Suze Orman is a well-known personal finance expert who provides plenty of advice for people on how to manage their money responsibly.
Although Orman has lots of tips for how to make smart financial decisions, she’s made it clear that there’s one investment that’s most important for everyone to make: building an emergency fund of eight to 12 months’ worth of expenses.
An emergency fund, or rainy day fund, can help you stay out of credit card debt and avoid other financial disasters that may arise.
But can you afford to put in as much money as Suze Orman recommends? Keep reading to see if you should follow Orman’s advice on such a large emergency fund.
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Why Orman recommends a large emergency fund
Orman told CNBC that an emergency fund of eight to 12 months is “the most important thing in anybody’s personal financial portfolio.” She believes this is even more important than investing in the stock market.
She bases this on the recent COVID-19 pandemic and the economic devastation that it caused. According to Orman, when financial hardships arise, “Your money is what is going to get you through.”
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 up enough money to cover between three and six months of living expenses. But Orman thinks that you’ll need to have more money than that in order to be fully prepared.
Should you follow Suze Orman’s advice?
For many people, it’s difficult to set aside enough in a bank account to cover even three to six months of living expenses. Saving enough to cover between eight months and a year’s worth of costs could take a lot of time.
Still, if you have a precarious employment or health situation, then being fully prepared for emergencies could mean having a larger amount of money saved than is commonly recommended.
This could be the case if:
- You are a freelancer without a steady paycheck
- Your employer has been having financial trouble
- You or a family member has a history of medical issues that could be expensive to treat or impair your ability to work
You may also want to err on the side of a larger emergency fund if you are the sole provider for your household, and you don’t have another income to fall back on.
However, you also have to consider the missed opportunities that may come from putting so much money into an emergency fund — especially if doing so affects the amount you can save for retirement or other goals.
High-yield savings accounts pay more interest than checking accounts or traditional savings accounts, but it’s still not a lot of interest. And the interest rate you earn may not be enough to ensure your money keeps pace with inflation.
Ultimately, you’ll have to decide what’s best for you — but you definitely want to be confident that your emergency fund is going to protect you from ending up in debt or being unable to cope with financial disaster. And a one-year emergency fund, as Orman recommends, should provide plenty of cushion to have that peace of mind.
View more information: https://www.fool.com/the-ascent/personal-finance/articles/heres-how-big-suze-orman-thinks-your-emergency-fund-should-be/