Not having an emergency fund can lead to one of the biggest money mistakes, Suze Orman says. How Congress may help
- Raiding retirement savings to pay for an unexpected expense is a big financial mistake many Americans are prone to making, personal finance expert Suze Orman says.
- To avoid that, people need to set up emergency savings accounts with money dedicated to covering unforeseen events.
- Here's how Congress and employers may step in to make that easier.
If your car breaks down or you have an unexpected medical bill, it may be tough to come up with the cash to cover the expense.
In a pinch, it can be tempting to take money from your 401(k) plan or other retirement savings account.
But that may be one of the biggest financial mistakes you can make, personal finance expert Suze Orman said Tuesday during a webcast hosted by the Bipartisan Policy Center.
"The majority of Americans, in my opinion, barely have the money today to pay for their everyday expenses," Orman said.
That's as inflation has pushed everyday costs higher on everything from rent to gasoline to food, she noted.
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A recent LendingClub report found that, as of October, 60% of Americans were living from paycheck to paycheck.
To break that cycle, people need to establish an emergency savings account dedicated solely to unexpected expenses, Orman said. Notably, emergency funds should be separate from other savings for aspirations like going on vacation or buying a new car or home, she noted.
Yet research consistently shows establishing an emergency fund is an elusive goal for many.
One-third of working adults — 33% — feel somewhat or very uncomfortable about their ability to pay an emergency $400 expense, a Bipartisan Policy Center survey conducted in February found. Nearly 8% wouldn't be able to afford it all.
"That's why employers need to get involved in this, because most people won't save money unless their employer somehow does it for them through a payroll deduction," Orman said.
Orman co-founded fintech company SecureSave during the Covid pandemic to help employees set up automatic contributions to emergency funds that are matched by their employers.
Participating employees save $38 per paycheck on average, according to the company, while employers typically match $3 to $5 per paycheck.
"It's an incredible thing to see people for the first time respond and go, 'I never knew what it felt like to have $1,000 to my name,'" Orman said.
How Congress may step in to help
Two lawmakers — Democratic Sen. Cory Booker of New Jersey and Republican Sen. Todd Young of Indiana — hope to advance a proposal to make it easier for employers to offer emergency savings accounts.
"We have got to start finding ways to have the average American have a better economic experience than they're having right now," Booker said during the Bipartisan Policy Center webcast on Tuesday.
Having emergency savings may help people avoid harsh consequences, such as losing their housing due to a shortfall of just a few hundred dollars rent, Booker said.
Moreover, it may also save taxpayers many multiples of that amount by reducing dependency on public resources, he said.
There needs to be more attention paid to the emergency savings challenges in this country.Sen. Todd YoungRepublican senator from Indiana
The lawmakers propose enabling employers to add emergency savings with limits of up to $2,500 alongside the 401(k) accounts. Employers would have the choice of whether to opt in and auto enroll their employees.
Booker and Young are also working on ways to extend those emergency savings options to employees who work for employers that do not offer 401(k) plans or other retirement plans.
"There needs to be more attention paid to the emergency savings challenges in this country and more tools given to rank-and-file Americans, which is what we're trying to accomplish here," Young said.
Both senators said they are optimistic they can push the proposals forward in the lame-duck session of Congress, which may include the consideration of new retirement legislation dubbed Secure 2.0.
However, even if end-of-year negotiations wind up not including emergency savings provisions, Booker said he will not be deterred. Because the bill is bipartisan, it may also have good chances of getting addressed in the new Congress, he said.