Suze Orman speaks during AOL’s BUILD Speaker Series at AOL Studios in New York City.
Jenny Anderson | WireImage | Getty Images
If your car breaks down or you have an unexpected medical bill, it can be difficult to find money to cover the expenses.
In a pinch, it can be tempting to withdraw money from your 401(k) plan or other retirement savings account.
But it could 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, today barely have enough money to cover their daily expenses,” Orman said.
He noted that inflation has increased the daily costs of everything from rent to gas to food.
More than Personal Finance:
Congress could make it easier to save for emergencies
Inflation increases US household spending by $433 per month
How to save on groceries amid food price inflation
A recent LendingClub report found that 60% of Americans were living paycheck to paycheck as of October.
To break the cycle, Orman said, people should set up an emergency savings account dedicated solely to unexpected expenses. In particular, emergency funds should be separate from other savings for dreams like going on vacation or buying a new car or home, he noted.
However, research consistently shows that building an emergency fund is a difficult goal for many.
A third of working adults — 33% — are somewhat or very worried about being able to afford a $400 emergency expense, according to a February bipartisan Policy Center poll. About 8% will not be able to afford it all.
“That’s why employers need to get involved, because most people aren’t going to save money if they don’t do it through payroll deduction,” Orman said.
Orman founded fintech SecureSave to help workers set up automatic contributions to emergency funds matched by their employers during the Covid pandemic.
Participating employees save an average of $38 per paycheck, according to the company, while employers typically match between $3 and $5 per paycheck.
“It’s amazing to see people say, ‘I never knew what it felt like to have $1,000 to my name,’ for the first time,” Orman said.
How Congress can step in to help
Sen. Todd Young, R-Indiana, (L) speaks with Sen. Cory Booker, D-N.J., outside the Senate Chamber at the U.S. Capitol on July 19, 2022 in Washington, D.C.
Chip Somodevilla | Getty Images News | Getty Images
Two lawmakers — Sen. Cory Booker of New Jersey, Democrat, and Sen. Todd Young, Republican of Indiana — hope to introduce a proposal to make it easier for employers to offer emergency savings accounts.
“We need to start looking for ways for the average American to have a better economic experience than they have right now,” Booker said during a Bipartisan Policy Center webcast on Tuesday.
Having emergency savings can help people avoid the dire consequences of losing their apartment due to a rent shortfall of several hundred dollars, Booker said.
What’s more, he said, he could save taxpayers many times that amount by reducing reliance on public resources.
More attention should be paid to emergency saving problems in this country.
Senator Todd Young
Republican Senator from Indiana
Lawmakers are proposing to allow employers to add emergency savings to their 401(k) accounts, with limits up to $2,500. Employers will have the option to hire and auto-enroll their employees.
Booker and Young are also working on ways to expand emergency savings options to employees who work for employers that don’t offer 401(k) plans or other retirement plans.
“There needs to be more focus on emergency austerity issues in this country and more tools to be given to rank-and-file Americans, which is what we’re trying to achieve here,” Young said.
Both senators said they were optimistic they could advance proposals in the lame-duck session of Congress, which could include a review of new pension legislation called Secure 2.0.
However, Booker said he would not be deterred even if the end-of-year talks ended without emergency austerity provisions. Because the bill is bipartisan, it may also have a chance to speak out in the new Congress, he said.