We all know we should be saving, putting a little away every paycheck for a rainy day.
But with the high cost of food, gas and housing, it’s not surprising that many Americans have very little left of their paycheck to put in a rainy day fund.
But not having a savings account – even a small one — can leave you dealing with long-term problems like debt, says personal finance expert Suze Orman.
That snowball effect is something Orman has seen over and over again in her 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 just yours that nobody can get … just to keep you safe and sound.”
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When it comes to how people handle financial emergencies in the U.S., there are some shocking statistics.
In 2021, a third of Americans couldn’t cover a $400 emergency expense, according to the Federal Reserve.
And without that small fund, many people will take on debt to try and cover the expense.
Orman says big problems can happen when you have to reach for your credit cards or tap into your 401(k) to cover those unexpected expenses.
It’s part of the reason she co-founded SecureSave, a company that is aiming to help people build a savings account through their employer, similar to a 401(k).
WATCH NOW: Full 30-minute Q&A with Suze Orman and Devin Miller of SecureSave
One in five Americans have dipped into the 401(k)s or IRAs to cover an emergency expense, according to a survey by NY Sports Day.
Orman says dipping into those accounts, or putting those expenses on credit cards is “risky”, especially as interest rates rise.
“It is not improbable that come April of next year that the Fed funds rate could be very close to 5%, which means interest rates on credit cards could be way up there,” says Orman.
“And even though interest rates on savings accounts are going up, if you don’t have any money to save, it does not matter what they’re paying you in a savings account.”
The snowball effect in action
Putting emergency expenses on a credit card might mean you’ll end up paying far more for it then you would have if you paid it in cash to begin with – and that’s when the snowball effect gets 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 that cost you?’ She said, ‘Well, I’m putting it on my credit card.’”
Orman says the woman’s car had been towed and she had to pay down traffic tickets before she could get it back. The woman was $1,100 in debt and still didn’t have her car back and working.
“And it’s gonna get worse for her as well. I said, ‘Why didn’t you pay the tickets when you got the tickets?’ She said ‘I didn’t have the money to pay the tickets.’
What starts as a fairly innocuous issue can quickly become a financial hole that can take years to dig your way out of.
Save what you can
With inflation running at the highest point in decades, no one is disputing how difficult it is to save right now – but it’s also necessary.
Experts generally recommend setting aside three to six months’ worth of living expenses in normal circumstances.
While that may not be possible for many Americans, Orman says starting small is much 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 world of 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. It’s not only 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.
Source: finance.yahoo.com