Suze Orman speaks during the AOL BUILD Speaker Series at AOL Studios in New York City.
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If your car breaks down or you have an unexpected medical bill, it can be difficult to find the money to cover the expenses.
In a pinch, it may be tempting to take money out of 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 the webcast organized by the Center for Bipartisan Policy.
“Most Americans, in my opinion, barely have enough money today to pay for their day-to-day expenses,” Orman said.
She noted that inflation has pushed up everyday costs for everything from rent to gas to food.
A recent LendingClub report found that as of October, 60% of Americans were living paycheck to paycheck.
To break this cycle, people need to set up an emergency savings account dedicated solely to unexpected expenses, Orman said. It’s important to keep emergency funds separate from other savings for aspirations, such as going on vacation or buying a new car or home, she said.
Yet research consistently shows that building 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 a $400 emergency expense, and Bipartisan Policy Center poll held in February found. Almost 8% would not be able to afford it all.
“That’s why employers have to get involved because most people aren’t going to save money unless their employer somehow does it for them through payroll deductions,” Orman said.
Orman co-founded fintech company SecureSave during the covid pandemic to help employees set up automatic contributions to emergency funds that match their employers.
According to the company, participating employees save an average of $38 in wages, while employers typically match $3 to $5 per salary.
“It’s incredible to see people respond for the first time and say, ‘I never knew what it was like to have $1,000 to my name,'” Orman said.
Sen. Todd Young, D-Ind., left, speaks with Sen. Cory Booker, DNJ, outside the Senate chamber at the U.S. Capitol on July 19, 2022 in Washington, DC.
Chip Somodevilla | Getty Images News | Getty Images
Two lawmakers — Democratic Sen. Cory Booker of New Jersey and Republican Sen. Todd Young of Indiana — hope to push 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 now,” Booker said during a Bipartisan Policy Center webcast on Tuesday.
Having emergency savings can help people avoid dire consequences, such as losing their home for being just a few hundred dollars short in rent, Booker said.
What’s more, it could also save taxpayers many times that amount by reducing reliance on government resources, he said.
Lawmakers are proposing to allow employers to add emergency savings, with limits up to $2,500, along with 401(k) accounts. Employers will have the choice of opting in and automatically enrolling their employees.
Booker and Young are also working on ways to extend these 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 savings in this country and more tools for ordinary Americans, which is what we’re trying to achieve here,” Young said.
Both senators said they are optimistic they can advance the proposals in a session of Congress that could include consideration of new pension legislation called Secure 2.0.
However, even if the talks end at the end of the year without the inclusion of emergency savings provisions, Booker said he would not be deterred. Because the bill is bipartisan, it may also have a good chance of being considered in the new Congress, he said.