When it comes to emergency savings, Orman rejects the idea of a one-size-fits-all solution. She critiques a common recommendation of having 3-to-6 months’ worth of savings, stating that it fails to acknowledge a vital distinction. Orman contends that individuals should differentiate between two types of emergencies: small and planned emergencies versus unforeseeable ones.
Orman’s perspective is justified by her extensive experience. As the co-founder of Securesave, an emergency savings fintech company, she understands the value of preparation. Many people fail to realize the importance of distinguishing between various types of emergencies.
To address this issue, Orman urges individuals to have two separate emergency funds. The first fund should cover 8-12 months’ worth of essential expenses that can be planned for in advance. This will ensure that individuals have a safety net during long-term financial challenges.
The second fund should hold at least a few hundred dollars specifically allocated for unexpected and minor emergencies. By allocating a separate account for these smaller predicaments, individuals can avoid dipping into their long-term savings in case of an unexpected expense.
In conclusion, having two distinct emergency savings accounts is a crucial step towards financial security. By planning for both large and small emergencies separately, individuals can safeguard their financial well-being effectively.
Emergency Funds: Your Financial Safety Nets
The Essential Emergency Fund
It is crucial to have an emergency fund that covers your essential expenses in times of crisis. Renowned financial advisor, Orman, suggests setting aside 8-12 months’ worth of essential expenses in this fund. If, for example, you lose your job, this fund will ensure that you can still afford necessities such as rent, utilities, and food. Orman emphasizes the significance of preparing for the worst-case scenario, stating, “If you lose your job, and you can’t work, how big should that account be? Eight to 12 months.” Drawing from the lessons of the 2008 economic collapse, she explains that it typically takes an average of eight months, and potentially even up to a year, for individuals to secure new employment during a crisis.
The Unexpected Expense Fund
In addition to the essential emergency fund, Orman recommends having a second safety net specifically designed for unexpected expenses. This fund can be relatively modest, with just a few hundred dollars set aside. Its purpose is to cover unforeseen costs such as car repairs or a malfunctioning refrigerator. By having this supplementary fund in place, you can avoid acquiring costly credit card debt.
Shielding Yourself from Credit Card Debt
Orman underscores the perils of relying on credit cards for unforeseen expenses. Often carrying high-interest rates of around 18% to 20%, credit cards can quickly lead to overwhelming debt if not managed carefully. Many people fall into this trap by succumbing to the allure of paying only the minimum monthly payment, which can result in maxed-out credit cards and mounting debts. By utilizing your second emergency fund for unexpected expenses, you can avoid the pitfalls of credit card usage and maintain financial stability.
Automating Savings: The Key to Financial Security
Saving money is a concern that many individuals face. However, renowned financial expert Suze Orman emphasizes the importance of automating savings to alleviate this worry. Orman believes that people often fail to realize the significance of automating savings because they typically spend what they earn. To combat this issue, she suggests automatically deducting savings from paychecks.
Orman’s experience and insights have even led her to create Securesave, a revolutionary employer-sponsored emergency savings account. Through this program, employers contribute matching funds to a dedicated emergency savings account for their employees.
By automating savings, individuals can establish a secure financial foundation and ensure they are adequately preparing for emergencies.