We all know we should be saving up, setting aside a little bit from every paycheck for a rainy day.
But with the high cost of food, gas and housing, it’s no surprise that many Americans have very little of their paycheck to put into a rainy day fund.
But not having even a small savings account can leave you dealing with long-term issues 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 books on personal finance and is the host of the Women & Money podcast, recently sat down with MoneyWise to talk about the importance of emergency savings.
“It’s yours and sometimes things happen in life and you should have a little account that’s yours and no one can get… just to keep you safe and sound.”
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When it comes to how people handle financial emergencies in the United States, there are some shocking statistics.
In 2021, a third of Americans could not cover a $400 emergency expense, according to the Federal Reserve.
And without this small fund, many people will go into debt to try to cover expenses.
Orman says big problems can arise when you have to reach for your credit cards or tap into your 401(k) to cover these unforeseen expenses.
That’s part of the reason she 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: Comprehensive 30-minute Q&A with SecureSave’s Suze Orman and Devin Miller
One in five Americans have dipped into 401(k)s or IRAs to cover an emergency expense, according to a investigation by New York Sports Day.
Orman says tapping into those accounts or putting those expenses on credit cards is “risky,” especially as interest rates rise.
“It’s not unlikely that in April of next year the federal funds rate will be very close to 5%, which means that credit card interest rates could be very high,” says Orman.
“And even if interest rates on savings accounts go up, if you don’t have money to save, it doesn’t matter what they pay you into a savings account.”
The snowball effect in action
Putting emergency expenses on a credit card can mean you end up paying a lot more than if you had paid it in cash to begin with – and that’s where the snowball effect hits you.
Orman gives the example of what can happen when something as simple as your car battery dies.
“Now your car can’t go anywhere and you have to get to work. And you don’t have the money to do it.
Orman says a woman she knew fell into this predicament, her battery died and her car broke down and she was taking Ubers to get around.
“And I said, ‘and how much does it cost you?’ She said, “Well, I put it on my credit card.”
Orman says the woman’s car had been towed away and she had to pay tickets before she could get it back. The woman was $1100 in debt and still hadn’t gotten her car back and was not running.
“And it will get worse for her too. I said, ‘Why didn’t you pay for the tickets when you got them?’ She said ‘I didn’t have the money to pay for the tickets.’
What starts out as a fairly innocuous problem can quickly become a money pit that sometimes takes years to get out of.
Save what you can
With inflation hitting its highest level 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’s not possible for many Americans, Orman says it’s better to start small than not save 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 all the difference in your situation.
She says it’s never too late to start your “freedom account”.
“Once you start saving, and you think about it, it’s like, ‘Oh my God, I like it. I like it. It’s not just 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 warranty of any kind.