We all know we should save, putting a little bit out of every paycheck for a rainy day.
But with the high cost of food, gas and housing, it’s no wonder many Americans have very little of their paychecks to invest in a rainy day fund.
But not having a savings account, even a small one, can set you up for long-term problems like debt, says personal finance expert Suze Orman.
This snowball effect is something Orman has seen time and time again in his career.
Orman, who has written several personal finance books and is the host of the Women & Money podcast, recently sat down with MoneyWise to discuss the importance of emergency savings.
“It’s yours and sometimes things happen in life and you should have a little account that’s yours that no one can get… just to keep you sane.”
Don’t miss out
WATCH NOW: Suze Orman tells a cautionary tale about what happens when you can’t cover your next financial emergency
If you’re not saving, you’re not alone
When it comes to how people handle financial emergencies in the US, there are some shocking statistics.
By 2021, one-third of Americans could not cover a $400 emergency expense, according to the Federal Reserve.
And without that little fund, many people will go into debt to try and cover the expense.
Orman says big problems can happen when you have to reach your credit cards or tap into your 401(k) to cover those unexpected expenses.
It’s part of the reason he co-founded SecureSave, a company that aims to help people set up a savings account through their employer, similar to a 401(k).
WATCH NOW: Full 30-minute Q&A with SecureSave’s Suze Orman and Devin Miller
One in five Americans have dipped into their 401(k)or IRA to cover an emergency expense, according to a NY Sports Day survey.
Orman says dipping into those accounts or putting those expenses on credit cards is “risky,” especially as interest rates rise.
“It’s not unlikely that by April of next year the Fed funds rate will be very close to 5%, which means credit card interest rates could be very high,” Orman says.
“And even though interest rates on savings accounts are going up, if you don’t have money to save, it doesn’t matter what you get paid in a savings account.”
The snowball effect in action
Putting emergency expenses on a credit card can mean you end up paying a lot more for it than if you paid cash to begin with, and that’s when the snowball effect hits you.
Orman gives the example of what can happen when something as simple as a car battery dies.
“Now your car can’t go anywhere and you have to go to work. And you don’t have the money to do it.”
Orman says a woman she knew ran into this situation, her battery died and her car broke down, and she was taking Ubers to get around.
“And I said, ‘and how much does that cost you?’ She said, “Well, I put it on my credit card.”
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Orman says the woman’s car had been towed and she had to pay traffic fees before she could get it back. The woman was $1,100 in debt and still didn’t have the car back up and running.
“And it’s going to get worse for her, too. I said, ‘Why didn’t you pay the bills when you got them?’ She said, ‘I didn’t have the money to pay the bills.’
What starts out as a fairly innocuous problem can quickly turn into a financial hole that can take years to dig out of.
Save what you can
With inflation at its highest point in decades, no one disputes how difficult it is to save right now, but it’s also necessary.
Experts generally recommend setting aside three to six months of living expenses under normal circumstances.
While that may not be possible for many Americans, Orman says starting small is far better than not saving at all.
“Listen, $10 is better than nothing. $50 is better than $10, $100 is better than $50. Because really, sometimes $200, $400 can make a big difference in your situation.”
She says it’s never too late to start your “freedom account.”
“Once you start saving, and you look at it, it’s like, ‘Oh my God, I like it.’ I like it. Not only is it easy, I don’t miss it.”
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This article provides information only and should not be construed as advice. It is provided without any warranty.
