Suze Orman warns most people are 'dangerously unprepared' for financial emergencies — here's how to step back from plunging into debt

Get some perspective: If you’re not saving, you’re not alone

Not saving? You're not alone. According to a 2023 Statistics Canada Canadian Social Survey on Quality of Life and Cost of Living report 1 in 4 Canadians would be unable to cover an unexpected expense of $500. What's worse, is the number of Canadians struggling to pay basic services. For instance, almost half (44%) of Canadians said that they were concerned about their ability to afford housing or rent.

Orman says big problems can happen when you have to reach for your credit cards or tap into your retirement savings to cover unexpected expenses.

It’s part of the reason she co-founded SecureSave, a company that aims to help people build up their emergency savings through their employer.

Orman, who has written several books on personal finance and is the host of the Women & Money Podcast, sat down with Money.ca to talk about the importance of emergency savings.

Based on her experience, Orman believes that an emergency fund is critical for everyone — regardless of your income bracket. She stresses that this account is your personal safety net to help when "things happen in life." She adds, "you should have a little account that's just yours that nobody can get … just to keep you safe and sound.”

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Learn the danger of debt snowballs

Putting emergency expenses on a credit card might mean you’ll end up paying far more for it then you would have if you paid it in cash to begin with – and that’s when the snowball effect gets you.

Orman gives the example of what can happen when something as simple as your car battery dies.

“Now your car can't go anywhere and you have to get to work. And you don't have the money to do it.”

Orman told Money.ca a story of a woman she knew fell into this predicament, her battery died and her car broke down and she was taking Ubers to get around. “And I said, ‘and how much does that cost you?’ She said, ‘Well, I'm putting it on my credit card.’"

Orman says the woman’s car had been towed and she had to pay down traffic tickets before she could get it back. The woman was $1,100 in debt and still didn’t have her car back and working.

“And it's gonna get worse for her as well. I said, ‘Why didn't you pay the tickets when you got the tickets?’ She said ‘I didn't have the money to pay the tickets.’

What starts as a fairly innocuous issue can quickly become a financial hole that can take years to dig your way out of.

First step: Save what you can

In a blog post, Orman repeated her mantra on the need for savings: "Your goal should be to have one year of living costs set aside in a savings account at a federally insured bank or credit union."

With inflation struggling to come down after reaching the highest point in decades, no one is disputing how difficult it is to save right now – but it’s also necessary.

Experts generally recommend setting aside three to six months’ worth of living expenses in normal circumstances.

While that may not be possible for many people, Orman said starting small is much better than not saving at all.

“Listen, $10 is better than nothing — $50 is better than $10 and $100 is better than $50. Because really, sometimes even $200 or $400 can make a world of difference in a financial situation.”

She says it’s never too late to start your “freedom account.”

“Once you start saving, and you look at it, it's like ‘Oh my God, I like it. I like it. It's not only easy, I don't miss it.”

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Second step: Keep it liquid

While investing is a critical part of saving for the future, it's best to keep a 'freedom account' (also known as an emergency fund or a f— fund) in an easily accessible, safe place, such as a high-interest savings account (HISA) or money market fund.

Keeping a freedeom fund in a HISA means you can quickly deposit and withdraw needed funds, plus you earn interest on your account deposits. Good options include:

• KOHO Easy: An all-in-one digital account, open a KOHO account and get a savings rate of up to 5% on all deposits.
• Neo Financial: It only takes a few minutes to open an account and start earning 3% on all savings account deposits with Neo Financial. Better still, open a Neo Financial High-Interest Savings Account and avoid minimum deposits and pay no monthly fees.
• Laurentian Bank: Earn 2.75% on savings accounts with balances up to $100,000 or early 3.75% for balances between $100K and $5 million. Open a Laurentian Bank account and pay no monthly fees.

Other options include:

• EQ Bank
• Simplii Financial
• Scotiabank's MomentumPLUS Savings Account

Use a money market fund, instead

If you prefer not having easy access to the cash, a good option is to invest in a money market fund. Money market funds aren't new and you can use either a mutual fund money market fund (typically come with higher fees) or an exchange-traded fund (ETF) money market fund. Whichever you choose, the fund will invest in short-term, high-quality and low-risk debt securities. ETF money market funds will trade on stock exchanges, like regular stocks. This means you can buy and sell these funds throughout the day, at market price, which gives the fund high liquidity (ie: easy access to your invested funds). The goal of a money market fund is to offer investors a safe place to park cash with minimal risk while providing a modest return.

Good options include:

• iShares Premium Money Market ETF (TSX:CMR)
• Purpose High Interest Savings ETF (TSX:PSA)
• HISA High Interest Savings Account Fund (TSX:HIS)
• CI First Asset High Interest Savings ETF (TSX:CSAV)

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—with files from Amy Tokic and Romana King

Sources:

1. Statistics Canada: Canadian Social Survey on Quality of Life and Cost of Living (February 13, 2023)

2. Moneywise: Suze Orman talk with Moneywise (November 2022)*

3. Suzeorman.com: Blog post (April 27, 2023)

Note: Moneywise.com and Money.ca are part of Wise Publishing.