Not having an emergency fund can lead to one of the biggest financial mistakes, says Suze Orman. How Congress can help

If your car breaks down or you have an unexpected medical bill, it can be difficult to find the money to cover expenses.

In a pinch, it can be tempting to withdraw money from your 401(k) plan or another retirement savings account.

But it may be one of the biggest financial mistakes you can make, personal finance expert Suze Orman said Tuesday during a webcast hosted by the Bipartisan Policy Center.

“The majority of Americans, in my opinion, barely have the money today to pay for their day-to-day expenses,” Orman said.

That’s because inflation has driven up the day-to-day costs of everything from rent to gas to food, she noted.

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A recent report by LendingClub found that in October, 60% of Americans were living paycheck to paycheck.

To break this cycle, people should create an emergency savings account dedicated just for unexpected expenses, Orman said. Notably, emergency funds should be kept separate from other savings for aspirations like going on vacation or buying a new car or house, she noted.

Yet research consistently shows that building an emergency fund is an elusive goal for many.

A third of working adults — 33% — feel somewhat or very uncomfortable about their ability to afford a $400 emergency expense, according to a Bipartisan Policy Center survey conducted in February. Nearly 8% could not afford everything.

“That’s why employers need to get involved in this because most people won’t save money unless their employer does it for them in some way through ‘a payroll deduction,’ Orman said.

Orman co-founded fintech company SecureSave during the Covid pandemic to help employees set up automatic contributions to emergency funds that are matched by their employers.

Participating employees save an average of $38 per paycheck, depending on the company, while employers typically match $3 to $5 per paycheck.

“It’s amazing to see people respond for the first time and say, ‘I never knew what it was like to have $1,000 in my name,'” Orman said.

Two lawmakers — Democratic Sen. Cory Booker of New Jersey and Republican Sen. Todd Young of Indiana — are hoping to advance a proposal to make it easier for employers to offer emergency savings accounts.

“We have to start finding ways to ensure that the average American has a better economic experience than they have right now,” Booker said during the Bipartisan Policy Center webcast on Tuesday.

Having emergency savings can help people avoid serious consequences, such as losing their homes due to shortfalls of just a few hundred dollars in rent, Booker said.

Moreover, it can also save taxpayers many multiples of that amount by reducing dependence on public resources, he said.

Lawmakers are proposing to allow employers to add emergency savings with limits of up to $2,500 alongside 401(k) accounts. Employers would have the choice to participate and automatically enroll their employees.

Booker and Young are also working on ways to extend these emergency savings options to employees who work for employers that don’t offer 401(k) or other retirement plans.

“We need to pay more attention to the challenges of emergency savings in this country and give more tools to grassroots Americans, which is what we’re trying to accomplish here,” Young said.

Both senators said they were optimistic that the proposals could be pushed through the lame session of Congress, which could include consideration of new retirement legislation dubbed Secure 2.0.

However, even if the year-end negotiations do not include the emergency savings provisions, Booker said he would not be deterred. Because the bill is bipartisan, it may also have a good chance of being addressed in the new Congress, he said.