Suze Orman Says This Is the 'Biggest Favor' You Can Do Yourself. Is She Right?

Orman thinks we should make saving for emergencies a financial priority.

Bestselling author and personal finance guru Suze Orman is a big fan of emergency funds. She frequently tells her fans to build up their emergency savings, arguing that it can be a lifeline in times of financial difficulty.

Most recently, Orman tweeted an image captioned, "The more money you save, the happier you'll be." The accompanying text said, "The biggest favor you will do for yourself is to make emergency savings a priority starting right now. Save. Save some more. And then keep saving."

Why emergency savings matter

Unfortunately, life does not always go according to plan. Let's say your car breaks down tomorrow or you suddenly need to cover unexpected medical expenses. Perhaps your work cuts your hours or lays off a large number of staff members. Do you have enough cash in the bank to cover that kind of financial shock?

Many Americans do not. One recent study showed that 50% of Americans have less than $500 in emergency savings. It's understandable, particularly given the pressures that soaring living costs and all the financial challenges of the COVID-19 pandemic have put on our wallets. The difficulty is that if life throws you a curveball and you don't have any cash put aside, you may find you have to take on debt. Over time, the interest payments on loans or credit card debt can add up, leading to more financial insecurity.

Orman recommends we aim to have at least one year's worth of essential living costs stashed away in an accessible savings account. Other financial experts suggest three to six months' worth is enough, but a lot depends on your situation. If you have a family to support and your job situation is not stable, you might want to aim for a year's worth of living expenses. If you're single and confident on the job front, three to six months' might work for you.

READ MORE: Emergency fund calculator

If you're not there yet, try not to panic; you don't have to build your fund overnight. Set yourself a goal and start to contribute something each month -- even if it's a small amount. If you're able to bring in some extra cash via a side hustle or cut something out of your budget to save more, so much the better. Put any unexpected windfalls into your emergency fund. In time, you will reach your goal.

Is Orman right about this?

Don't get me wrong, it's hard to understate the importance of building a decent emergency fund. It's a cornerstone of any solid financial plan and can insulate you against unforeseen difficulties. Not to mention, if you worry about money, knowing you have savings can help you sleep easier at night.

That said, there's a limit on how much you need. It isn't entirely true to say the more money you save, the happier you'll be. You need enough to give you peace of mind and tide you over. But money that's sitting in a savings account isn't earning the types of high returns that will help you to build wealth.

There's a big difference between saving and investing. Saving involves putting money aside in a bank account or savings account for shorter term goals, including your emergency fund. It's money you don't want to take risks with and might need to access quickly. Investing is about buying assets with a plan to generate wealth over time.

Right now, you could get an APY of around 4% on a top savings account, though many pay lower rates. That won't make you rich -- in fact, it may not even beat inflation. In contrast, the compound average annual returns on the S&P 500 over the past 30 years is over 10%. If you invested $1,000 today and earned 4% a year in interest, it would be worth around $2,200 in 20 years time. If it earned 10% a year, that $1,000 would be worth over $6,700 -- three times as much.

You may be reading this and wondering why not put all your money into a brokerage account and skip savings altogether. The issue is that there are no guarantees when it comes to investing. There will be years when the stock markets fall, and some investments may not perform as well as you'd hoped. The longer you can leave your investments, the better able you'll be to ride out any short-term drops.

Investments are for money you won't touch in the coming five years or more. If you can build a diversified portfolio of assets, they can start to work for you and build wealth for the future. But before you do that, you need a solid emergency fund. That way, if something goes wrong, you won't be forced to sell your investments (potentially at a loss) to cover your bills.

Bottom line

Emergency funds are essential, but you only need a finite amount of money in savings. If you save too much, you'll have less cash available to invest for the future. On the other hand, if you don't have any savings, you may be in a precarious position. The idea is to build both savings and investments. Each fills a different role and together, they can help you build wealth.