Saving and investing for your future is something we should always be doing. But it’s not always easy, especially when prices and interest rates keep going up. A survey from H&R Block found that 52% of Canadians are unprepared for retirement because they don’t have enough money left at the end of the month for savings. This goes to show that employees are struggling and in need of some support to secure their futures. As an employer, you have the power to help employees save money with things like matched contribution programs, and providing them with the tools and resources they need to make a positive impact on their financial well-being.
Here’s how you can do that.
Encourage employees to save 👏
Some employees may think that having a credit card or line of credit is good enough to pay for an unexpected emergency, or pay for an expensive item or trip. But having access to a line of credit or other less costly forms of borrowing isn’t a good replacement for savings. Employees may want to use inexpensive debt (not credit cards) for unexpected costs so they can continue to put money toward long-term investments, thinking that the long-term investments will eventually earn more than enough to pay off what they borrowed, including the interest. If employees were calculators, and made all of their choices based on logic and math, that might work. But employees are human. Don’t forget that when employees pay interest, they are doing it with after-tax dollars. This means the true cost of servicing that debt is technically higher than it looks.
Beyond the logical and mathematically sound reasons for using debt vs. savings for emergencies, there are a lot of behavioural reasons to consider, such as how they think about money and how controlling they are with money. Your employees should have a dedicated emergency savings account. Why?
First, the habit of savings builds a natural buffer into their month-to-month cash flow, and gives them wiggle room if they have to navigate a family emergency or other sudden shifts in cash flow. Second, employees are likely to be more careful when they spend cash out of savings vs. using their credit card or line of credit to pay for an emergency. If the fridge breaks down, there is more pain when paying because they’re using the money they worked hard to save to pay for it. And it could slow down their decision-making when searching for a lower cost replacement.
Also, having savings in a dedicated account creates a more visceral limit to how much is available to them. A line of credit, on the other hand, could allow them to access far more money. Finally, employees' credit availability is reduced when they use credit to cover emergencies, and this can negatively impact their credit scores. That’s why emergency savings should be in a dedicated high-interest savings account. Preferably, it should have a slight withdrawal delay, or they should refrain from carrying the card to that account in their wallet so it doesn’t get used like a backup debit card.
Registered accounts aren’t ideal for short-term or emergency savings 🚫
It’s important that employees know that their RRSP and TFSA aren’t to be used like bank accounts. Many employees may be under the impression that a TFSA is good for short-term or emergency savings. Some even think that the cash amount tucked in their RRSP is a good storage spot for these types of savings. But short-term and emergency savings are not the best use for these accounts. Your employees shouldn't waste their precious and limited tax-efficient investment options to house cash for short-term needs. Even if it's a so-called “high-interest” rate that’s earning cash, the tax savings on those earnings will be very low. While interest income is 100% taxable as new income, the amount of interest this cash will earn, even in high-interest savings, is miniscule compared to the amount other types of investments could earn over the long term.
RRSPs are especially dangerous when used for savings. Even if an amount sitting in an RRSP hasn’t earned a penny, taking it out will come with a tax consequence because the withdrawal will be fully taxable as income at any age.
The TFSA is a little more tricky. You can find countless articles written by financial professionals with varying degrees of expertise suggesting that a TFSA is a great spot for emergency savings. But it’s not! Using a TFSA to house emergency savings squanders the tax-free powers of these accounts. Instead, make the most of the tax-free function of your TFSA, and use it for longer term investments that have the potential to make a much greater return over time.
The other issue with using TFSA accounts for short-term savings is that recontribution rules can be tricky. For employees with a lot of TFSA room, they may never run into this issue. But let’s say the employee has maxed out their TFSA. They take out money to cover an emergency, but don’t need it all. So they decide to put some back into their TFSA in the same year of the withdrawal, they may be over-contributing. They must wait until the next fiscal year to put those funds back in. If an employee has a maxed-out TFSA and takes money out, and then puts funds back in, it could get complicated.
So keep emergency savings simple. Employees should keep these funds in accessible accounts that they can withdraw from relatively easily without creating any tax consequences, or risking penalties. Emergency savings need to be stored in a bank account, and a TFSA or RRSP should never be treated like bank accounts. Instead, they are most helpful for long-term, tax-efficient, investment accounts.
Ensure employees have access to financial literacy resources that’ll help them get a deeper understanding of the different financial products, like savings accounts, TFSAs and RRSPs. Employers could also consider offering emergency savings options to employees, such as payroll deductions for an emergency fund that will allow them to set it and forget it.
Help employees know if they’ve put enough away 💰
Providing employees with an easy-to-use cash flow management app, such as Winton, can help them figure out their financial position. With Winton, they’ll have two simple numbers to sum up what once was a complicated maze of expenses. They’ll know their committed (bills and regular payments) and spendable (day-to-day spending recommendation) numbers. With those two amounts, they can more easily calculate their emergency savings needs. And they can see how much money they can free up to fund both short- and long-term goals.
So employees won’t have to worry that saving for emergencies will jeopardize their ability to fund their longer term goals, like retirement, and they’ll most likely be able to do both.
One more thing: an employee with emergency savings is far less likely to stop or alter regular investment contributions, or make unplanned withdrawals that can take their plan off track.
Financial literacy is at the heart of achieving financial success. Employees are better able to navigate their finances and make smart decisions when they are equipped with tools and resources that allow them to learn and apply financial knowledge to their unique situations. A financial wellness program, like the Real Life Money program, is a great way to support employees in their financial literacy, so you can create an environment of happier and more productive employees.
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Real Life Money program
An annual, digital, behaviour-based program that teaches employees everything they need to know and do to become financially capable. Our proven financial wellness program that combines online workshops, microlearning, and a powerful app called Winton that puts financial capability, confidence and control into the hands of every employee. Learn more.
This blog is based on the blog Show clients how to save and invest more with a cash flow plan.