Suze Orman speaks during AOL’s BUILD speaker series at AOL Studios in New York.
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An unexpected bill is never convenient.
But now there are even more reasons that unforeseen events — like car repairs or medical expenses — could put Americans on shaky financial ground.
The blame is on record-high inflation, which has jumped to its highest level in 40 years and pushed up the price of everything, including staples like butter, lettuce and dairy products.
Entering 2023, the risk of recession is also looming. The question is whether the decline will be mild or prolonged, with leading tech employers like Amazon and Google already starting to cut jobs.
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Meanwhile, the federal government has reached its debt ceiling. Now it’s up to lawmakers to find a solution so the US government can keep paying its bills.
“We have a financial pandemic right now, so to speak,” personal finance expert Suze Orman told CNBC.com.
“It’s now … a more dangerous scenario than it was during the pandemic,” Orman said of the current financial risks facing Americans.
Many Americans were able to set aside more money than usual during the Covid-19 pandemic, as government aid meant additional benefits for the long-term unemployed, while millions of individuals and families received stimulus checks.
Those federal funds are now being cut, Orman said, as the bills — including rents that have tripled in some cases and mortgage interest rates that have risen higher than they were before the pandemic — are starting to arrive.
The environment could be the wake-up call many Americans need, she said.
“You need to have an emergency savings account, whether you’re in a recession or not,” Orman said.
Americans live paycheck to paycheck
There’s never been a better time to set aside emergency cash.
Still, putting away a significant amount of money remains a challenge for many Americans.
A new survey shows that 74% of Americans are now living paycheck to paycheck, according to SecureSave, a financial technology company that aims to help workers put aside emergency savings through their employers.
As inflation has risen, more than half of respondents — 54% — have reduced their savings in the past year, according to a November online SecureSave survey of more than 1,000 American adults.
About 67% of workers cannot afford to pay emergency expenses of $400.
Orman co-founded SecureSave during the pandemic after 40 years of telling people they needed to have a savings account, she said.
“Our goal was very simple: to see if we could change the savings rate in America for those who had never saved a penny before,” Orman said.
Many people often fall short of that goal. A new Bankrate.com survey finds that most adults — 57% — can’t afford a $1,000 emergency expense.
“People just can’t do this on their own,” Orman said. “The key is not to see it in your salary.”
Through SecureSave, workers can have savings — such as $25 — automatically taken out of their paychecks, and then get a $3 or $5 match from their employers.
At the end of the year, people are often surprised by the amount they save, whether it’s $600 or $1,000, Orman said.
“They love it,” she noted. “And many times they will raise their salary contribution.”
“Once you start to see how easy it is to save, you like to save more,” Orman said.
By hoarding the cash you have on hand, you may be able to avoid switching to credit cards as interest rates rise.
To that point, 25% of consumers surveyed by Bankrate.com said they would incur an unexpected expense of $1,000 or more and pay it off over time.
That strategy would be even more expensive now, with new credit card offers for even the best qualified individuals at interest rates of nearly 20%, noted Mark Hamrick, senior economic analyst at Bankrate.com.
How Savings Can Help Other Financial Goals
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Establishing emergency savings with an employer is only the first hurdle to financial health, according to Orman.
The next goal is to save eight to 12 months’ worth of expenses in a separate savings account, Orman said.
Even cash-strapped workers should contribute enough to their retirement accounts up to an employer match, if any.
“You can’t pass up free money,” Orman said.
As workers reduce their financial stress, it can also help employers. Nearly 30% of workers say they spend one to two hours a day worrying about money, according to SecureSave.
It can also help prevent regrets later, says Bankrate.com’s Hamrick.
“Historically, we’ve found that among the things Americans regret most about their personal finances is the failure to save for emergencies,” Hamrick said. “The second is failure to save for retirement.”