Suze’s Advice Revisited: Increase Emergency Funds Pay Debt Minimums
Trent, from The Simple Dollar discussed Suze Orman’s new advice to the masses:
Regardless of your overall credit card debt, if you have very little saved in an emergency savings fund, I want you to make a shift in your financial strategy. My new advice is to focus on building up as much savings as you possibly can. With rising unemployment rates, having a larger emergency fund is vital, even if it means you are only paying the minimum due on your credit card balance.
I realize many are split on the issue being that Suze recommended we do the exact opposite in recent years. But now we have a recession on our hands which warrants a change in her advice and I commend her for taking such a bold step which is sure to be met with criticism. Say what you want, but I think her advice is on point. Trent makes the following points about her recent change in position:
Suze used to have a very similar philosophy, but now it’s changed in one significant way: instead of a small emergency fund at the start, she encourages people to get an eight month emergency fund before continuing on to repaying debts.
Although I agree with Suze that a change in strategy is appropriate, I disagree with this particular change.
First of all, it’s a long term solution to a short term problem. Many economists expect the economy to rebound in 2010. A typical estimate is that the recession will drag on for a total of eighteen to twenty-four months, with a bit more than half that time already elapsed.
What about jobs? The rate of job loss is slowing down across the country and in some areas is already beginning to rebound.
In short, it’s quite reasonable, based on the information before us, to conclude that we’ve already caught the brunt of the storm and that the future holds an economic rebound.
I don’t know about you but my crystal ball is broken and I have no way of really knowing when the recession will cease and when/if the economy will rebound. Even when the market rebounds, that may mean great news for the markets but until that jobless person gets a job, they have no way of knowing when things will get better. In the mean time while they do have a job and other means of income I think it wise to continue to save towards at least 6-8 months with the goal of 1 year’s expenses in an emergency fund.
In this environment, making the decision to jump from debt repayment to emergency fund building is about two years overdue. Of course, two years ago, many fewer people would have listened to such advice.
At the same time, proposing an eight month emergency fund is really poor money advice to most people, particularly in the face of such a short-term concern. Eight month emergency funds are long term goals, taking years of careful planning and consistent saving to build. Proposing such an enormous goal to someone facing a big pile of monthly bills and a typical income isn’t great advice.
I know this from experience. If you had told me a few years ago that I should have eight months’ worth of living expenses in the bank, I would have laughed at you. It simply wasn’t realistic.
This comment IMHO is underestimating the ability of someone who is financially illiterate to make the necessary changes to their budgets and lifestyle in order to start saving money and paying down debt. I think we have to stay away from from making the assumption that if something is hard for us then it must be doubly hard for others. I know this because what’s hard for me is actually easier for most of the women in my Meetup groups. Ive see women connect with the information, advice and encouragement from others and move on to make crucial changes in their finances. I can’t share their names but I can tell you that it is possible for someone to get the information and advice they need and make immediate change.
8 months is nothing these days and frankly we should be aiming for 1 year of living expenses. No one really knows when the economy will rebound and moreover they often don’t know when they are about to lose their jobs. So why would we advocate feeding the credit card companies and banks when they are yanking limits before and/or after you pay down your debts? I don’t advocate small emergency funds. Ever. We should always be prepared for the worst. Even when the economy was doing well people were still out of work for various reasons. Bottom line, just be prepared, and especially now? For the worst.
I understand that CC companies are engaging in all sorts of tactics which include raising interest rates, but honestly, if our income diminishes or becomes non-existent do you really think they would be on the top of my list to pay? My house comes first. I know that many will say then you’re saving money but the interest on the cards beats the interest you’re saving but we’re talking practicality here. Interest schminterest. I will worry about that once Ive secured new income and in a place to worry about the debts. In the mean time I will preserve my credit by paying the minimums.
As one of The Simple Dollar commenters said ”
.…creditors are merciless. they are doing what they always do, whatever they can get away with. so this reiterates my point: if you can sock away some serious cash over the next year, do it. in a year or so, you can start paying down your debt…but in THIS economy at this particular juncture in time, cash is much more valuable than credit.
as for “taking responsibility”, this IS responsible. you’re making a choice to remain solvent, to survive, to hold tight and make it through a rough storm. this is the equivalent of saving water during a drought. the weatherman may SAY it’s going to rain, but using your water to water your lawn is shortsighted and dumb. you hold on to it, let the lawn dry out and give it some extra TLC, water and care when you know you can. sometimes investment starts with you, your kids and your life.
Now don’t get it twisted, I am not saying to abandon your debts, I am saying pay a little more than the minimum and slow your roll on the snowball especially if you’re facing an impending layoff. But you never really know now do you? For example, if your credit card minimum is $300, then pay $350-$400 but I wouldn’t be putting anything more than $450-$500 because that extra could come in handy to pay the light or gas bill.
I know that some are not too happy with Suze’s latest change with the economic wind but I give her credit for making such a bold change. In the end we have to do what makes sense for us, just make sure that in the worst case scenario, whatever you choose, that you and your family will be ok.
Jump in on the conversation on Twitter, here are some tweets on this topic:
brokeinthecity@Gingerlatte Her advice doesn’t seem balanced for those in debt/with no EFs or small EFs. I’d be confused about what to do if I were them.
brokeinthecity@Gingerlatte It would take many people 3-4 years just to save 8 months in an EF, while they’re paying high interest on their debts.
brokeinthecity@Gingerlatte …you should be trying to clear it no matter what. And if you don’t have an EF, at least 1 month is the bare minimum, not 8.
brokeinthecity@Gingerlatte Agreed. But others may say that her old advice was fine (clear debt, save 6 months). My real issue is that if you have debt..
khyron4eva@Gingerlatte always advocated 12 mo e-fund personally. seen VPs out of work for years post dot bomb.about 1 hour ago from TweetDeck in reply to Gingerlatte
khyron4eva@Gingerlatte re: Suze – risk arb? ppl w/ income last yr could pay down the high rate debt. now greater risk of layoff, issue is survival.about 1 hour ago from TweetDeck in reply to GingerlatteRT
- brokeinthecity@Gingerlatte Esp since she doubled back on her advice from the year before. *shrug* I listen and I absorb but I don’t necessarily follow
RT
- brokeinthecity@Gingerlatte PF pundits, and people who try to tell you how to manage your money just go with the economic flow. It’s our job to sort the BS
msceo8
@Gingerlatte then they are up a creek without a paddle. i think their is merit to what she is saying. everyones situation is different
- msceo8@Gingerlatte someone w/ 6K in savings who is a homeowner with 6k shouldn’t deplete their savings to pay off the debt…if something happens
- msceo8@Gingerlatte yup, i saw her on Oprah last week. cc debt sucks, but in these uncertain times folks need all the cash they can get
This is a great article. It really gives a gal something to think about. Thanks!
I'm choosing to ignore her advice. I started with 67K in debt and got down to 12K in 7 months. Haven't done much to tackle debt in the last 7-8 months because I was concentrating on saving tons of money for a major cross-country move. That money is now saved and we're back to tackling the CC debt….especially since the company just tried to double our interest rate (we called and got it lowered back down). I'm not taking any chances. In addition, I'm trying to sell a home that I'm probably going to lose about 10-15K on, and I need to save for that loss.
I have a secure contracted position (unless the National institute of Health goes out of business) and DH can collect unemployment for 13 months and that will more than cover all of our expenses.
So yea, we'll continue to throw all money at debt (credit card, pay off a vehicle that we need to sell, and then house loss) and then save for an EF.
I know lots won't agree with that strategy, but it's been working so far!
Awesome points!!! I did a whole post in response to this, more coherent than my tweets (LOL),…
Located here: Should we just save for 8 months of emergencies and pay our debt minimums?
This is a good debate, because there is no easy answer. If you have a 1 week emergency fund and a lot of debt to pay off, any answer you come up with leaves something lacking.
You have to start somewhere though, and I'd personally do 6 months, then debt.