Suze Orman: Even the Wealthy Need Emergency Savings

On Tuesday, the Bipartisan Policy Center hosted a webinar event that featured Sens. Cory Booker, D-N.J., and Todd Young, R-Ind., advocating for the inclusion of the emergency savings legislation they co-sponsored in the broad package of retirement reforms known as the Secure Act 2.0.

The event also featured an opening interview with personal finance expert Suze Orman, co-founder of SecureSave, an emerging firm that works with employers to offer payroll-linked emergency savings accounts to employees. Like the senators, Orman urged Congress to pass legislation that would allow employers to automatically enroll their workers in “sidecar” emergency savings accounts.

According to Orman, even workers of more than modest means can have trouble balancing their short- and long-term financial needs. Many may have 401(k) plan accounts with sizable balances, she noted, but they can also struggle to meet an unexpected expense stemming from events such as car accidents, major appliance breakdowns, medical emergencies or uncovered damage to a home.

“Far too often, these people end up having to withdraw emergency funds from their 401(k) plans, and this results in significant taxes and penalties being paid,” Orman said. “My view is that automated emergency savings accounts that are situated with the employer are essential to avoid such issues.”

Normal Savings vs. Emergency Savings

According to Orman, many Americans say they are savers, but what they are really focused on is generating enough money to go on a vacation every once in a while or to go out to eat regularly with their friends and family.

“That is all fine, but it is not the same thing as being prepared for financial emergencies and preparing for your retirement,” Orman said. “Normal savings and emergency savings are different.”

It is bad enough, Orman said, when people have to pull assets from 401(k) plans to meet unexpected expenses. Even worse is when a person has to turn to high-interest credit cards or personal loans that can easily trap them in an unending cycle of toxic debt.

“We all know how easy it is for people, even those with substantial earnings, to get trapped in the cycle of debt,” Orman said.

In Orman’s experience, many working people have the means to improve their situation with respect to emergency savings. They just need to be shown where and how to get started — and why it is important to save specifically for emergencies.

“Today, there is no automation on this front, and nobody is giving people a sense of direction about how to save and why to save for these types of issues,” Orman said. “Instead, people are used to making instant transactions across accounts and moving their money around so easily, from checking accounts to savings accounts back to checking.”

No Client Is Too Wealthy

According to Orman, the act of labeling and setting aside assets for emergencies is surprisingly powerful from a behavioral finance perspective. As is the fact that the employer, by providing the benefit on a voluntary or automated basis, is (implicitly or explicitly) endorsing the importance of preparing for emergencies.

Orman urged financial advisors to set aside the assumption that their typical client is too wealthy or already too financially savvy to benefit from such a focus on emergency savings. Simply put, those with substantial means are also subject to emergency expenses, and these can be surprisingly substantial.

In fact, for the wealthy, there is a particular risk that an unexpected job loss or income disruption, whether due to a layoff or a personal health crisis, could come at a time when the client has taken on substantial debt or new expenses, potentially resulting in financial ruin.

As Orman stressed, everybody should have at least eight months to a year of expenses set aside in case of emergency. If a client is “seriously rich” and their normal expenses are $200,000 a month, that would imply they need something like $2.5 million set aside. Generating an emergency savings account of this size will take both time and a strategic approach, Orman said, and the advisor can play a valuable role in the process.

Pictured: Suze Orman (Photo credit: Marc Royce)