I saw Liz Pulliam Weston’s disagreement with Suze Orman’s advice that people who have no emergency fund (but have credit card debt) should pay minimums on their credit cards while they build up an e-fund.
This is a very tricky situation for a couple of reasons:
1. People who have lots of credit card debt probably don’t have the self-discipline necessary to put money into a savings account. In other words, they may save up some money and then go blow it on something just because they have the money. People usually don’t get into credit card debt because they are practicing financial prudence. That said, do these same people have the self-discipline to pay more than the minimum towards their credit card debt? Good question.
2. Not having an emergency fund while you are paying off debt is scary too. Why? Because when an emergency comes up (like the transmission goes out on your car), it will have to go on a credit card. It’s very demoralizing to pay down a credit card only to charge it right back up again when something bad happens. I know this from experience. It makes you just want to give up.
I think the solution depends on the person but I kind of like the idea of doing both at the same time. Regardless, I think a real behavioral change is going to have to take place. I think such a change starts by creating a budget. You have to know where your money is going so that you can find out how much extra you can put towards debt liberation.
Let’s say you write out your budget and you have $100 extra per month to put towards your debt. I would recommend setting up an online savings accout and direct $50 of that $100 to that account, automatically each month. FORGET THE ACCOUNT IS THERE! Just keep socking away $50 per month. Then, I would either use Dave Ramsey’s or Suze Orman’s approach (which method’s better?) and put the other $50 per month towards getting out of debt.
What are your thoughts? Do you have anything to add to the mix?