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Liz Pulliam Weston vs. Suze Orman – Who’s Right?
By JLP | May 1, 2009
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.
Who’s right?
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.
My thoughts:
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.
For example…
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?
Topics: Budgeting, Credit Cards | 15 Comments »
May 1st, 2009 at 10:05 am
Pay down the debt and take your chances on the E-fund, unless you’re at zero percent. Adjust your tax withholdings if you always get a refund and direct THAT to savings (and put it in an account that’s earning above 1%.) Use more coupons/do more rebates, have a garage sale, barter w/friends to share books/movies/babysitting services, etc to generate/save some cashola. Hot dog stands at our garage sales have done well, but the kiddos get to keep the money!
PS I’m getting tired of overexposed financial “gurus” (and Rachel Ray, but that’s a different genre…)
May 1st, 2009 at 10:47 am
I agree that people need to do both – fund the EF and pay off debt. When the debt is finally paid off, the entire amount should be put toward the EF.
If nothing else, it’s a psychological boost to watch the EF balance climb as the debt balance drops. It feels like you’re doing twice as much to improve your financial position.
May 1st, 2009 at 10:51 am
“It makes you just want to give up.”
Thanks for being so honest. Most people give up because they are tired of the treadmill. Frankly, I don’t blame them.
Personal finance is so “personal” -no one size fits all approach. This what makes personal finance so controversial sometimes.
A single person compared to a family of 6 may get difference advice on debt and savings.
To answer you’re question it does not hurt to do both. This is what I did and it worked out fine for me.
May 1st, 2009 at 11:05 am
I’m with Liz.
People should have a minimalist emergency fund, whether it’s $1,000 or one month’s worth of expenses, while paying down credit cards. Then, when they’re CCs are paid off, build up the emergency fund to 3-6 months, or what ever is most appropriate for you.
Depending on interest rates, ability to save, and time to build up a Suze-side emergency fund, Orman’s advice could be debilitatingly expensive to some, especially if they do lose their incomes.
May 1st, 2009 at 1:37 pm
Another thing to keep in mind is that people with bad credit (who are likely the people with lots of credit card debt) are finding that the credit card companies are reducing their limits as they make payments… if that happened, you no longer can deal with the emergency by putting it on your card, therefore an emergency fund may be the safest route, since that’s the only way the money remains under your control, albeit at the cost of much higher interest.
May 1st, 2009 at 2:24 pm
Ahh I see that the E-fund really has achieved a cult-status. The financially optimal answer is to pay off the credit card. If an emergency happens, put it on the credit card and keep paying it down. If an emergency does not happen, you did not pay interest on the credit card debt you could have paid down.
May 1st, 2009 at 5:50 pm
I agree with Moneymonk’s point that theres no ‘on size fits all’ answer. Early is also right that paying the debt first is optimal. Some sort of cash buffer is important. How large it should be depends on your individual financial situation and risks.
Suze’s advice is based on the fear that the credit card companies will cut credit limits and/or shut down accounts altogether. So if someone with CC debt hits an emergency they could be without any cash and then get their credit shut down as well. Also Suze wants people to have an 8-12 month emergency fund which is pretty large IMHO. Its a nice goal but maybe too large to be practical for many. You could spend years building such a surplus and by then the recession is over.
May 2nd, 2009 at 6:18 am
I think that Dave Ramsey’s advice is excellent. Get your emergency fund to $1000 and then pay off your debt. A $1000 emergency fund will be enough to cover most unexpected expenses.
May 2nd, 2009 at 1:57 pm
We hedge by doing both (though aggressively weighted towards removing the debt). The mathematically optimal approach ERE suggests may omit probabilities of unforeseen circumstances, or the chance that a particular situation will not lend itself to the “put the emergency on the card” solution. Peace of mind comes at a small cost for us by pulling back from the optimal $$$-maximizing frontier curve.
May 3rd, 2009 at 4:50 am
I just can’t live without a safety net. I’d save about 3 months worth of living expenses first. Then I’d continue to save, but at a slower rate, and start putting more money toward the credit cards. Once I hit 6 months EF, I’d stop saving and put it all toward the CC. During this time, however, I would max out the 401k to the extent there was a company match.
May 4th, 2009 at 10:54 am
I still like paying off the credit card rather than saving. The savings accounts today pay so little while credit card companies are increasing their rates.
Every person is different, and we all have different “mental accounting” methods that make us feel warm and fuzzy with a safety or emergency fund. But, if you are ever to really get wealthy, you need to acknowledge your bad ideas and habits and change them. Keeping money in an account earning 1% while paying 11-18% interest is not smart. It may make you feel better, but it isn’t the optimal course of action. I am not saying don’t take that course, but just realize this safety blanket is costing you considerable amounts of money, especially if your credit card balance is large.
While money is an emotional topic, those who do the best act like Mr. Spock. They look at the most logical course of action.
May 5th, 2009 at 12:09 pm
I don’t see a big advantage either way. Pay down first – save first. My advice is to pick one way and do it. Doing it is better than worrying about a few bux of interest one way or another.
May 6th, 2009 at 10:28 am
I have to agree with Suze. Easy for me to say. I have no credit card debt and a 24 month emergency fund.
May 7th, 2009 at 1:26 am
Suze’s spot on.
People should be padding their emergency accounts because this will buy them time in the event of a job loss. It doesn’t matter who you are; the risk of job loss is higher. It’s hard to pay the credit card bills at all without income or savings.
May 12th, 2009 at 2:04 pm
Depends on the individual. Depending on the debt amount. If you can pay it off in a hurry or utilize a debt solution out there to help pay it off quicker, then i would say pay it off quick has you can. Stop paying those outlandish interest payments.