Here’s how Big Suze Orman thinks your emergency fund should be
Suze Orman is a well-known personal finance expert who provides lots of tips for people on how to manage their money responsibly.
While Orman has plenty of tips on how to make smart financial decisions, she has made it clear that there is one investment that is most important to everyone: building an eight to 12 month emergency fund. of expenses.
An emergency fund, or rainy day fund, can help you avoid credit card debt and prevent other financial disasters that could arise.
But can you afford to put in as much money as Suze Orman recommends? Read on to see if you should take Orman’s advice on such a large emergency fund.
One email a day could help you save thousands
Expert tips and tricks delivered straight to your inbox that could help save you thousands of dollars. Register now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
Why Orman recommends a large emergency fund
Orman told CNBC that an eight to 12 month emergency fund is “the most important thing in anyone’s personal financial wallet.” She thinks it’s even more important than investing in the stock market.
She is basing this on the recent COVID-19 pandemic and the economic devastation it has caused. According to Orman, when financial difficulties arise, “your money is what will get you out of it.”
Orman’s recommendation on the size of your emergency fund is out of step with what many personal finance experts recommend. The most common advice is to save enough money to cover between three and six months of living expenses. But Orman thinks you’ll need more money than that to be fully prepared.
Should we follow Suze Orman’s advice?
For many people, it’s hard to put aside enough in a bank account to cover even three to six months of living expenses. Saving enough to cover eight months to a year of costs can be time consuming.
Nonetheless, if you have a job or a precarious health situation, being fully prepared for emergencies could mean saving more money than is generally recommended.
This could be the case if:
- You are self-employed without a regular salary
- Your employer has financial problems
- You or a family member has a history of medical problems that could be costly to treat or interfere with your ability to work
You may also want to favor a larger emergency fund if you are the sole provider in your household and have no other income to rely on.
However, you should also consider the missed opportunities that can arise from putting so much money into an emergency fund, especially if it affects how much you can save for retirement or other goals.
High yield savings accounts pay more interest than traditional checking or savings accounts, but it’s still not much interest. And the interest rate you earn may not be enough to make sure your money keeps pace with inflation.
Ultimately, you will have to decide what is best for you, but you absolutely want to be sure that your emergency fund will protect you against debt or the inability to cope with financial disaster. And a one-year emergency fund, as Orman recommends, should provide a lot of cushion for that peace of mind.