Suze Orman, the financial advisor behind ten consecutive New York Times bestsellers, is urging American households to pause contributions to new children’s investment accounts until they have secured an eight-month emergency fund. Her advice comes as rising healthcare costs force families to rethink their safety nets, prioritizing immediate liquidity over long-term growth for minors.
The bottom line is clear: if your medical bills or insurance gaps could derail your finances, do not add your own money to a child’s account. Orman argues that the current economic climate, marked by unpredictable medical expenses, demands a larger cash buffer before families consider investing in future generations.
The Five Conditions for Pausing Contributions
In a recent post on her website, Orman outlined a strict set of rules for parents considering the new federal children’s investment accounts. She stated that she does not want any parent or grandparent adding their own money beyond free contributions from the government or their employer if any of five specific conditions apply. The first and most critical condition is that the household’s emergency savings fund is not large enough to cover at least eight months of living expenses.
The other four conditions include having credit card debt, holding student loan debt, carrying car loans, or having retirement savings that are not on track. By this standard, anyone with a car payment or a revolving card balance is not yet a candidate for contributing to these accounts. Orman’s position is that financial stability for the parent must precede financial planning for the child.
This approach reflects a broader shift in financial advice that prioritizes risk mitigation. Orman noted that until a family’s financial life is in great shape, she does not want parents to contribute to these accounts. The emphasis is on ensuring that the primary earners are protected against sudden financial shocks before they allocate resources to long-term investments.
The Specific Requirement for an Eight-Month Buffer
The requirement for an eight-month emergency fund is a significant departure from the common three-to-six-month guideline often cited by other financial planners. Orman argues that rising healthcare costs necessitate this larger safety net. Medical emergencies are among the leading causes of personal financial distress, and a larger cash reserve provides the breathing room needed to handle unexpected bills without falling into debt.
This figure that matters serves as a hard stop for contributions to children’s accounts. If the savings are below this threshold, the family should focus entirely on building that buffer.
This strategy is designed to prevent the cascading effect of a medical emergency. When a family faces a high deductible or an uninsured medical expense, having an eight-month fund allows them to pay the bill without tapping into credit lines or selling investments at a loss. It ensures that the household can maintain its standard of living and continue making debt payments while dealing with the health crisis.
Medical Debt and Insurance Gaps as Triggers
Orman’s advice highlights the specific role that medical debt and insurance gaps play in financial planning. She warns that these factors trigger the “stop” rule for contributing to children’s accounts. Even if a family has no credit card debt or student loans, a significant medical bill can quickly change their financial status. The unpredictability of healthcare costs means that a smaller emergency fund may not be sufficient to cover a major hospitalization or chronic condition management.
The federal government has opened investment accounts for nearly 70 million children, depositing a $1,000 seed amount for eligible kids. Employers are also allowed to add up to $2,500 a year to these specific children’s accounts. While Orman encourages families to take this free money, she insists that they should not add their own funds if they are vulnerable to medical debt. The logic is that the free money is a bonus, but adding personal funds to a risky financial situation is a mistake.
Insurance gaps are a particular concern. Many Americans have high deductibles or limited coverage, which can lead to substantial out-of-pocket costs. Orman’s advice effectively treats the potential for medical debt as a form of existing debt. If a family is likely to incur medical expenses that they cannot easily cover, they should prioritize building their emergency fund rather than investing in a child’s account. This approach aligns with the broader goal of avoiding financial overextension in the face of health uncertainties.
Tax Implications and the Broader Strategy
The tax treatment of these accounts is a key factor in Orman’s recommendation. Contributions to these accounts are made with after-tax money, so they will not be taxed again when withdrawn. However, 100 percent of the earnings withdrawn will be taxed as ordinary income. This structure matches the rules laid out by the IRS, which state that nothing can be withdrawn during the growth period that ends in the year the child turns 18. After that, the account generally follows traditional IRA rules, under which anything above the after-tax basis is taxable when it comes out.
Investors will note that this tax structure makes it less attractive to contribute if the family is already in a high tax bracket or if they have immediate financial needs. The lack of a tax deduction for contributions means that the money is already taxed, and the earnings will be taxed again upon withdrawal. For families dealing with medical costs, the opportunity cost of locking up funds in a child’s account is high. They need the liquidity to pay for healthcare, not the long-term growth that comes with tax-deferred earnings.
Orman’s advice is part of a broader strategy to avoid lifestyle creep and debt. She advises using the 50/30/20 budgeting rule, allocating 50 percent to needs, 30 percent to wants, and 20 percent to savings and debt. This framework helps families keep their spending in check and ensures that they are saving enough to build their emergency fund. She also warns against taking on reverse mortgages, suggesting that selling and downsizing is a better option for those on tight budgets. The goal is to respect debt and limit it to what a household can afford to avoid financial overextension.
Orman, who founded the Suze Orman Financial Group in 1987 after leaving Prudential Bache Securities, has spent decades helping people spot financial patterns early. Her advice to delay Social Security benefits until age 70 to maximize financial security in retirement is another example of her long-term planning philosophy. By focusing on immediate security and avoiding unnecessary debt, families can build a more resilient financial foundation. For those facing rising medical costs, this means prioritizing their own emergency fund before investing in their children’s future. The result is a more stable household that is better prepared to handle the financial challenges of modern life.
Sources
- Suze Orman
- ‘I Don’t Want You to Contribute to a Trump Account for a Child. Period’: Suze Orman Says Take the Free $1,000 and Your Employer’s $2,500, Then Stop.
- Suze Orman Shares 4 Strategies To Avoid Running Out of Money – AOL
Photo: User:David Shankbone (CC BY 3.0)
