Three Ways You Can Improve Your Financial Health
November 19, 2020 | Audrey Faber
Many Americans are not prepared for unexpected expenses or a decline in pay. An analysis from JP Morgan Chase recommends that individuals should have savings of at least six weeks of take-home pay in an emergency fund. Although many of us are familiar with the rule of thumb that we should have a few months of income saved up in case of an emergency, the majority of Americans still fall short.
During times when nearly 50% of Americans don’t have anything set aside for savings, understanding good financial health is even more important. Financial health is a term that is used to describe an individual’s monetary situation. This may include income, savings, retirement fund and expenses.
Setting your employees up for financial success.
Employers can help their employees get ahead of the financial game by offering a rich suite of benefits. Here are a few of the best ways you can help your employees save money and improve their financial health.
401(k) Retirement plan – what are the benefits?
- Benefit from tax breaks. Those who participate in a 401(k) gain access to two tax breaks. The first is contributions are tax-deductible. Participants also benefit from a lower taxable income because contributions to a 401(k) do not count toward gross income for the year.
- Take advantage of an employer match. Americans are leaving billions of dollars in unclaimed 401(k) matches on the table. Match money is tax-free. Participants do not have to pay taxes on the money until it is withdrawn at retirement.
- Contributions and compounding interest. The earlier a participant enrolls, the longer they benefit from compounding interest. Compounding interest is essentially the interest participants earn on top of their interest.
Health Savings Account (HSA) – what are the benefits?
- Money grows tax-free. Money that is invested into an HSA grows tax-free. This means any interest or additional earnings generated on the invested money is tax-free. Any money that is not spent on qualifying medical expenses can continue to accumulate in the account until retirement, similar to a 401(k)-retirement savings plan.
- HSAs are portable. Any money that is invested into the account will also be available for future qualified medical expenses. Your HSA money rolls over from year to year. This holds true regardless if the medical insurance plan changes or if transferring to a different job.
- Others can contribute to your savings. Contributions to an HSA can come from the account owner, an employer, a relative or anyone else who wishes to make a contribution. The maximum contributions for an HSA in 2021 is $3,600 for an individual or $7,200 for couples. The maximum increases by $1,000 for individuals who are 55 or older.
Flexible Spending Account (FSA) – what are the benefits?
- Reduces taxable income. Contributions to an FSA are deducted through the payroll process. Contributions are taken out pre-tax, which means taxable income is lowered. This can reduce the amount of taxes the participant pays.
- Instant access. Participants elect the total amount they want to add to their FSA at the beginning of the year. Contributions are split up and taken out of the participant’s paychecks throughout the year. However, once an FSA plan starts, any money invested is available to use. This is beneficial because if something comes up and the participant needs extra funds, they are able to access the funds immediately.
- Family coverage. The owner of the FSA isn’t the only family member who can benefit from the account. Spouses and dependents who are claimed on the account owner’s tax return are also eligible to benefit from FSA funds.
Finding the best fit.
By starting to save now, individuals can put themselves ahead of the other 50% of the population who don’t have any savings.