Is Suze Right? Do Emergency Funds Now Trump Debt Repayment?

Recently, an astute reader pointed me towards a very interesting Yahoo! Finance article entitled Suze Orman and the New Rules of Credit Card Debt. In the article, Suze changes her usual tune of paying down debt above all else – here’s a key quote:

“If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can.”

Furthermore (with my own emphasis added):

Orman says that all spare dough–after making the minimum payments–should go into an emergency savings fund. Ideally, she says, that fund should contain eight months worth of living expenses.

This is a pretty surprising shift, since Orman was, until very recently, a very strong advocate of focusing on eliminating all high-interest debt. Obviously, this shift has been brought on by the recent economic downturn – but is it really a sensible change in philosophy? I’m not so sure.

Let’s start with the basics. My philosophy on debt repayment is pretty typical: get a small emergency fund built up, then start snowballing all of the high interest debt (anything over about 6% or so) by focusing all of your energies on paying off the debts in order of descending interest (highest interest first). If you’re interested in how to get this philosophy rolling in your own life, I’ve discussed it in detail before.

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.

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.

I propose a different solution.

First of all, ignore a huge, long-term goal like an eight month emergency fund. It took me years of difficult decisions and hard saving to reach that kind of buffer – and I had a strong income and a stubborn streak behind it. Sure, it’s a great long term goal, but if your focus is on getting through the downturn, your focus should be on the short term.

Instead, if you’re worried about the downturn, focus on three key things through the rest of this year (and thus, likely, through the bottom of the downturn):

One, apply some realistic frugality in your life. I’m not suggesting completely revamping your life and completely altering your behavior – that will simply fail most of the time, just like a crash diet.

Instead, look for truly effective ways to trim your spending, particularly things you can do one time and have them continually save money over the long haul. Work on improving energy efficiency, for example, by air sealing your home, installing a programmable thermostat (and actually programming it), and using more energy-efficient equipment (like light bulbs and appliances). Prepare home-cooked meals in advance and freeze them (so when you’re busy during the workweek, inexpensive homemade meals are very easy). Call and get your credit card interest rates reduced. Cut out services you’re not using – and try to negotiate any package deals you have, like a cable/phone/internet bundle. All of these tactics can be done once in a big energetic flurry, but they trim your monthly expenses thereafter.

Two, acquire no new debt. Instead of replacing things, stretch out their use a little bit longer or find alternate means. Take your credit cards and hide them, so you’re not tempted to use them for things you don’t truly need. Most importantly, take it one day at a time. Focus on just avoiding the credit cards in the here and now – don’t stress out about the long term.

Three, build up your emergency fund a little now, but be prepared to reduce it in 2010. If you’re really concerned about the short term, it’s okay to slow down the debt repayments in the short term. Just pay the minimums and put the extra payments (along with all of that other money you’re saving through the steps above) into your emergency fund. Then, when the economy rebounds and you’re clearly in a more secure state with your employment and other factors, don’t be afraid to put some of that savings towards your debts.

To put it simply, an eight month emergency fund, if you have high interest outstanding debt, is overkill. However, in the current economic environment, there is reason for people to feel much less secure about their employment. So, in the short term, I’d bulk up my emergency fund a little – but only in the short term.

If you take nothing else away from this article, take this away: everyone’s personal sense of risk is different. For many people, the current economic state goes far beyond their comfortable risk threshold – if you feel that way, bulk up your emergency fund in the short term. If you feel confident and comfortable where you’re at, pay down your debt – or, if you don’t have any debt, start saving for retirement. The key, as always, is to spend less than you earn. If you do that – and do it with all your might – the details of whether to pay down debt or to have a bigger emergency fund pale in comparison.

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  1. d_2 says:

    i feel like you have ignored a key point: if you are putting your money into the credit card instead of an emergency fund, and then you lose your job, you have no money.

    if you have instead put it into your emergency fund, and then lose your job, you can use the fund to continue to buy food, make rent, pay the minimum on the card, etc.

    seems like the same argument that one can make against pre-paying your mortgage. obviously, your own mileage may vary, and it largely depends on your own situation, but i don’t think it’s totally off the wall to consider building an emergency fund first in ANY economic conditions.

  2. Baker @ ManVsDebt says:

    You smashed it right out of the park!

    Of course, having an emergency fund of some kind is an important part of breaking the cycle of using debt in the first place. But, 8 months! Are you kidding?

    I think this whole discussion distracts people away from the real point. It gives them a scapegoat, “the big bad economy.” People need to accept responsibility for their situation and take the necessary steps to change it. Saving 8 months of expenses while ignoring high interest credit card to me seems to be a glorified form of fear-mongering.

  3. Chris says:

    I have two main sources of income right now: a divorce settlement from ex and widow’s SS benefits. The divorce settlement end in 6 years, and so I need to make sure all my credit card and other debt is paid off as much as possible before then. Although it might be nice to have such a huge emergency fund, right now paying off debt is my main focus, as well as living frugally, amassing little, and all that entails.

  4. Battra92 says:

    Suze Orman is not a financial advisor; she is entertainment (well, not really all that entertaining unless you count the SNL parody skits.)

    I’m not super optimistic about the economy turning around in 2010 what with the dunderhead running things. I hope it does but either way now is the time to be conservative and pay down debt and not continue it. Emergency funds are great but debt will eat your Emergency Fund faster than a job loss will.

  5. jb says:

    Yeah, some balance is needed.

    If you have credit card debt and no savings, its definitely worth putting some towards each. Perhaps half towards debt and half towards the savings. Maybe 1/4 towards one and 3/4 towards the other.

    It may also depend, realistically, on how bad off you would be if you lost your job (or needed to tap that fund for another reason). If you’re renting an apartment and could just as easily move in with family (even if that would only be a last resort), that’s different than if you either have a mortgage or don’t really have someone else’s couch to crash on.

  6. Battra92 says:

    Baker, you are so right about the scapegoat of the Economy. I’ve seen companies doing very well use the economy as a reason to downsize people they’ve wanted to get rid of for years.

  7. Johanna says:

    I don’t think that page with the jobs data means what you think it means. Right up until the end of 2008 – the last quarter for which there’s actual data – the chart shows the rate of job loss accelerating. It’s only in the *forecast* that the rate of job loss begins to slow. And frankly, I don’t put too much stock in economic forecasts. How much hand-wringing have we seen lately about how “nobody could have predicted” that things would get as bad as they’ve already gotten? How do we know that things aren’t about to get even worse, in a way that “nobody could have predicted”?

  8. I think you’re absolutely right. While I agree with Suze about shifting one’s focus from paying down debt to accumulating savings, eight months is a huge chunk of cash. Your advice seems much more sensible.

  9. I agree Baker people need to take responsibility for mistakes they have made.

    -Nate

  10. j says:

    Right on Battra92, Orman is a talker not somebody to be taken seriously.

  11. Nicole H. says:

    Ugh, my company used the scapegoat of the Economy to only give hourly employees 40% of the typical raise (these people only make $9-$12 an hour). We experienced double-digit growth last year. How does that add up?

    Saving 8 months pay for an emergency would take years for most people. I think that’s more of an end-goal instead of a more reasonable goal like Dave Ramsey’s $1000. In a time when a lot of people are taking their first baby steps in the world of personal finance, Suze’s advice is impractical.

  12. Unfortunately, most financial “gurus” (I can’t use the term experts) tend to be reactive instead of proactive, and this is what we get.

  13. rrgg says:

    You’re ignoring the reason she said this in the first place.

    The reason for the change is that banks have a new policy of closing credit card accounts with no balance, or drastically lower credit lines.

    So Suze is concerned about 1 particular dangerous case — if you pay off your credit card debt, your card gets closed, and you lose your job, now you’re left with little to no cash. If instead you followed her advice, you’d be left with an emergency fund and debt. At least you’d have cash flow. Having zero cash flow can be dire, and it’s much worse than having debt.

  14. Jadzia says:

    I *really* think that your mileage may vary on the size of the emergency fund, depending on your personal circumstances. We fortunately paid off all of our non-mortgage debt about a year and a half ago. At that point I immediately shifted ALL my extra savings towards college funds for the kids. (Not into 529s for some esoteric reasons that probably would not apply to anybody reading this, but college savings nonetheless.) Once the market crashed, however, I took a step back and looked at our real financial situation. We have 3 kids under the age of 10. My husband allegedly freelances but I can’t remember the last time he actually made any money. My 9-5 job is government work so pretty secure, but my second job is freelance and therefore NOT all that secure. So for now I’m redirecting all savings towards building a one-year emergency fund, and we’re about 1/3 of the way there…. It just makes me very very nervous not to have a real solid cushion given the sources of my income and the number of people I am supporting. Plus, 2% in my formerly “high yield” savings account is outperforming the market. : (

  15. Jan Dillaha says:

    I totally understand why Suze has changed her strategy, but 8 months is an over reaction to her previously casual attitude about credit cards.

    Here’s the problem. For some people who are having financial difficulties and have never been successful saving before the idea of saving 8 months of expenses seems unattainable. It’s just too big a leap from where they stand.

    I have talked to folks who initially don’t believe that they can come up with $1,000 in a small emergency fund.

    BTW – I disagree with the premise that having no cash is worse than having debt. Having no immediate source of funds can be difficult. However, I have found that many folks in that situation still manage. It’s not fun, but it’s manageable. I have talked to more than one person who was so overwhelmed by their debt that they were considering suicide.

  16. rrpf says:

    i’m torn about this. First off, I think that Suze Orman isn’t a very good financial advisor but a broken watch is correct twice a day. This may be one of those times.

    My thoughts:

    1. 8 months of expenses should be roughly equivalent to 4 months of net income. (I like the All Your Worth ladies!) If it’s more than that, you aren’t living very frugally anyhow. If it’s less, more power to you. So to all the people saying ZOMG 8 MONTHS!!!!, how are you defining a month’s expenses? At 20% savings, you can put away 4 months of expenses (assuming 50% of income = 100% of expenses) in 20 months. Not exactly an eternity. Also, you can use “snowflaking” to make that date come sooner.

    2. The opinion of “most economists” doesn’t hold much water for me. Same folks didn’t really predict this mess, did they? Regardless of whether you think the gov’t is doing the right thing or wrong thing currently, you have no idea what direction the economy will take. Nor do “they”. For now, things look a bit grim and for me, it will take some concrete positive numbers over a sustained period to convince me that things are headed back to normal.

    3. The gov’t and the Fed are entering experimental territory regarding how they are managing the money supply and gov’t intervention. If someone says that it will work or that it won’t work, both are hypotheses at this point.

    For me, I’m working towards a year of “expenses” from my previous 6 month cushion but I’m hedging my bets. Some of that cushion is in the form of having a few weeks of food/toiletries/etc laid up at home, some in the form of gold/silver, some in cash (actual banknotes in my safe), and finally the remainder in FDIC-insured money market account.

    If things turn around, I’ll lose whatever gains I could have made on that “investment”. I’ll eat/consume my way through my supplies (but still keep a week or 2 worth on hand). I’ll probably keep the precious metals and a small amount of cash on hand. Finally, I’ll move some of the money in the money market account to higher-risk investments.

    If things don’t turn around soon or get worse (for the world/USA or for me personally in the form of a period of unemployment), I’ll be glad I took these precautions.

    Every penny and minute you spend is an “investment”. Every financial decision you make has inherent risk. All you can do is manage that risk for yourself and your loved ones.

    Best of luck to all TSD readers! I truly hope this is a small bump in the road to reaching all of our longterm goals.

  17. ann says:

    Johanna is right — you’re misinterpreting the employment numbers. Not only are the employment numbers still awful, but job gains typically don’t arrive until a recovery is underway. At best, there are still several months of job losses ahead.

    8 months is a good goal, but let’s face it, most people would be doing well to just have a one-to-three month cushion built up. And you can’t get that if you’re throwing most of your money at paying down debt quickly. I disagree with Suze on the 8 months, but I think this strategy, in this economy (with its surprising lack of liquidity) is a correct one.

  18. Kathryn says:

    It seems to me that you are essentially agreeing with Suze – increase your emergency fund in light of what we know so far about the current economy -you’re just debating how much of an increase is needed. You could even approach it slightly differently and say after you have a four month emergency fund you split your discretionary cash 70%/30% between adding an extra buffer and paying off debt. Believe me, if you get laid off and there is no job in sight until 2010, you’ll want to have as much of an emergency fund as possible.

    My advice would be to picture that unemployed scenario, bulk up your emergency fund to the point where you don’t feel panicked,then attack those debts with gusto again.

    There are pessimists and there are optimists,but the reality is none of us really knows where the bottom on this economic crisis is.

  19. partgypsy says:

    Obviously if these people could save 8 months of living expenses, they would not be in debt. Her advice is like telling a cancer patient to save money by being healthy. A little to late for that! And it doesn’t change the fundamental pproblems these people have, namely spending more than they earn. Your advice is spot on, and the best thing is that it will put you in a better financial situation even after (someday) this current financial crisis is over.

  20. Barbar says:

    First, unemployment is still awful. While some folks beleive the economyis not tanking like it used to be, those jobs are not going to reappear, and more will dissapear. Many jobs that are disapperaing are beling elminated and preparing for a job in antoher field takes time. Secondly, being without cash is only acceptable IF you have or can get a decent line of credit. Banks are eliminating credit right and left. Youre very likely to pay off your credit cards, have no cash because you paid of the cards and then be left with nothing. Now one poster said something about knowing people with “nothing” who manage, but I doubt its without access to credit or families they can move in with. I believe that everyone should have at minimum a six month fund of expenses (not emergency expenses, but what you expend on a daily basis). is this tough? Sure, but it can be done, but using some basic frugality.

  21. Nikc says:

    partgypsy you took the words out of my mouth. 8 months of living expenses requires stellar savings skills and would be difficult even for the best and most patient savers. This advice is just bad.

  22. 60 in 3 - Health and Fitness says:

    I stopped paying off my home equity line, but only because the interest rate was so low and tax deductible. It’s almost exactly what the interest rate is (after taxes) in my savings account. However, I would definitely pay off credit cards before emergency fund for two reasons.

    1. Credit card debt is usually really high interest. Too high to let sit for long.
    2. Credit cards, in an emergency, are a form of emergency fund since they can be drawn on.

    Gal

  23. Bree says:

    I think it all depends on your individual situation. Here in Michigan, people are losing their jobs left and right and are not likely to find a job for at least several months. Many people who have just received their degrees are looking for a year or more. I don’t think having 8 months living expenses is way out of line around here. People are wondering how they are going to eat, not what their credit card bills are.

  24. Trying to Build an 8 Month Emergency Fund in this environment is ridiculous. Yes, we all agree, having 8 months of expenses in the bank would be nice, but its impractical if you don’t have the cash already.

    If you don’t have cash on hand to meet monthly expenses, by all means only pay the minimums on your credit card balances. Credit card interest rates hover around 20% and are an EXTREMELY EXPENSIVE way of borrowing money, I don’t recommend it unless in an extreme circumstance.

  25. Danielle says:

    So, I’m actually doing both of the things noted by everyone. My personal risk factor consists of having an emergency fund in the $1000+ range and growing and paying down debt. While my job is expendable, I am confident that I could find a decent paying job quickly. After all, when I watch the job postings for my field, there are five to six every week. So, my take is save whereever you can and pay down the debt at the same time.
    Cheers!

  26. Karen M says:

    I, too, am concerned with your interpretation of the unemployment numbers. Michigan’s unemployment rate just keeps climbing, as several states are now in double digits. With the upset in the car industry, think these numbers will continue to go up. A rebound by 2010? Maybe, if you keep in mind that the numbers will go up, then down. If that can be termed a “rebound.”

  27. Ms. Clear says:

    I agree that debt is a bad trap to be in. Many people who are heavily in debt are going to struggle to save up that kind of money, so they may be better off paying down that debt and looking for ways to change their cost of living–moving in with relatives if possible etc.

    We have one low interest student loan, but are planning on paying it off anyway. Yeah, it’s low interest, but if I pay it off, I’ll be debt free.

  28. Johanna says:

    I don’t think Suze is suggesting that anyone will be able to build up an eight-month emergency fund overnight. I think that she’s saying that IF you do not have an eight-month emergency fund already (and it’s very likely that anyone with credit-card debt does not), then you should add to your emergency fund rather than paying down the credit cards. Build up the emergency fund as much as you can, until either (1) you save up eight months’ expenses, (2) the employment situation starts to look better, or (3) banks stop canceling credit cards left and right.

    And it sounds reasonable to me. The goal is just as rrgg describes: to minimize the chance that you’ll find yourself with no job, no cash, and no credit. In the face of that possibility, dismissing Suze’s advice simply because eight months’ expenses is a lot is like saying to a cancer patient (to borrow partgypsy’s analogy), “Oh, chemotherapy is too hard. Here, take an aspirin instead.”

  29. Mia says:

    I’m inclined to agree with Suze. In our current economic climate the possibility of job loss is all too real. Experts predict a turnaround in 2010, but what if they are wrong. I agree with the idea of fattening up your emergency fund if you don’t have much there…for security purposes. If you do lose your job, you’ve got some cash to tide you over rather than immediately having to resort to using your freshly paid off credit cards. While I do understand that 8 months of living expenses is lot to save up – it’s probably realistic given the job market.

  30. Jim says:

    partygyspy #15 said: “Obviously if these people could save 8 months of living expenses, they would not be in debt.”

    You’d think that would be true in general but I’ve seen a lot of exceptions. Surprisingly there are people that will have sizable savings AND significant credit card debt simultaneously. While this doesn’t seem to make sense, I think its an emotional attachment to the savings and the security of having the cash on hand that leads people to do it. But at the same time they aren’t really getting ahead so they accumulate credit card debt.

    I don’t think its typical but it definitely happens.

    Jim

  31. Cathy says:

    Gotta disagree with you on this one, Trent. I think Suzi is spot on. This is a big, big change from her normal advice, which means there’s a big paradigm shift here. She used to advise using credit cards as an emergency weapon (which I disagree with her on). Credit card companies are cutting or closing accounts, even on people with no problems. Lifelines are being cut – you don’t know if you will be one of them. Therefore, you need to make a lifeline for yourself, even if it makes your debt repayment a little longer and a little more uncomfortable.

  32. SP says:

    The problem is, there really aren’t any great solutions to someone with lots of debt and little savings, except to start a few years ago to turn things around.

    If you weren’t paying attention to your finances until the recession hit full on (last fall? That seemed to be when the job market got really scary.), then nothing you can do is really “enough” to put you in a secure place. Of course, you still can improve your position, and now is better than next year.

    Given that, I agree with Suze. In the short term, I’d rather have the cash to pay my bills during job loss, even if it included some monthly minimum from my CC company.

  33. Milo says:

    Odd thing I noticed. Running with the debt snowball theory, I always pay $1 more than the minimum on all the debts I am not working on. I found that it shows up on the credit report as “Pays more than the minimum amount due.” I don’t know if it helps the credit score, but it looks better on the report.

  34. CGK says:

    Not to be nit-picky, but- Please, please, please stop relying on the “take a bit of time and start calling your credit cards to reduce your interest rates” plan. Credit cards are cancelling inactive cards, raising rates on others… they’re trying for all the $ they can get, just like the rest of us. I’ve received 3 notices (for three different credit cards) of changes/updates to my accounts which will increase fees and interest rates. Luckily, my cards have 0 balance.

    Other than that, it’s true: save as much as you can, where you can and get comfortable… things are only going to get messier before they get better.

  35. Well didnt the credit card reports come out today saying that people are starting to pay off more debt from their credit cards than actually use them…what is the point of having an emergency fund when you have a card with interest as high as 22%/year…

  36. Jennifer says:

    From our experience, my husband and I saved $1000 and put every bit extra to our debt; we follow the Dave Ramsey plan. Once we started this plan of putting all of our extra money, we really started to make progress on our debt. We have paid off 10,000 dollars since January. We will be completely out of debt except for our house by February 2010, and then, we are going to focus on building our emergency fund.

    When we tried to split it up, we felt that we were getting nowhere.

    Has anyone else had this experience?

  37. To be fair to Suzie Orman, I will say that saving up eight months of emergency fund is actually not that drastic.

    With the economy in such a bad shape, if we are laid off, the next job is likely to come, say, six months down the road or even longer.

    Assuming all credit is now being deprived without our proof of income, cash flow is extremely important. Without cash to meet debt obligations, a lot of things can happen, to our detriment.

    Besides the obvious need to put food on the table, and to continue our health care and children’s education, our assets are at risk of being taken away for pennies on the dollar.

  38. Mike Rowan says:

    I know that I wish that I had given more thought and effort into having a reserve fund!

    I agree that you can’t obsess about it, but we need to have some discipline.

  39. Sherry says:

    I agree with Suze. In fact, I applied that to my own life. I’m a single mom with two kids, no child support and a good job (at the moment). I had $3000 from last year’s tax refund. I looked at the $300 in debt that I pay each month (this doesn’t include my living expenses, obviously), and figured out where my debt would be in 1 year if I paid $3000 + my normal monthly payment. I would still have that debt in 1 year. I may not have my job though. I put my money into an ING orange account where I earn 12% more than my regular savings account, it’s still accessible to me, and I know I’ll still be able to pay my debt and take care of my children should I lose my job. I’ve minimized my bills, I’m thrifty with my money and I have not acquired any new debt in over two years. I split my “extra” money each month between my debt payment and my savings account.

    Two years ago I was in that place where I had huge bills and no money, no savings. I will never be there again. Hard economic times may only be an excuse to some, but to the hundred thousand+ who lose their jobs each month, it’s a reality.

  40. AnnJo says:

    I also think Trent’s interpretation of the economic forecasts is overly optimistic.

    Assuming the forecast is accurate, high unemployment is still going to continue for the better part of two years and growth, if it comes, will be very weak. But I question whether the forecasts adequately take into account the anti-growth policies that are being put into place or threatened by the Obama administration.

    In fact, I’m not sure it would be possible to take them into account adequately, since we have never before had a government whose policies are DESIGNED to crush our economy. Higher taxes, massive regulation and cap-and-trade energy policies are like taking three sledge-hammers to an ailing patient – not conducive to recovery.

  41. George says:

    Just because job loss is slowing down, doesn’t mean it has reversed. According to the USA Today chart, we will continue to see unemployment increase throughout this year at the very least!

    There are only two ways to increase your emergency fund to stretch 8 months… either add to it or reduce the expenses. Preferably both!

  42. Jen says:

    Put me in the increased emergency fund camp. Up until last December, I had been working for almost 20 years, accumulating debt, living from pay cheque to pay cheque, and apart from some retirement savings, I had NO emergency savings.

    I now have about 3 months of emergency expenses saved (assuming that I chop my budget to the bare bones), but I want to have at least 6 months saved before I accelerate my payments on $10,000 in credit card debt.

    1) I’m a divorced woman with a mortgage and my own business. I have supplemental health insurance (in addition to the excellent health insurance I get from paying my taxes) and disability insurance, but no employment insurance at all. On the one hand, having multiple revenue streams means that it is more likely for work to slow drastically than to disappear altogether, which means my three months of funds may be closer to 4-6 months, but on the other hand, I can’t rule out things getting really bad.

    2) Up until a couple of months ago, my credit card rate and my savings account rate were both at 3%, but in May, the credit card goes to 4% and my savings account recently dropped to 1.85%. So I am taking a little hit in the difference in interest rates, but not enough to convince me to stop saving.

    3) I’m in the eye of the hurricane financially. I am actually incredibly busy this year, much more than last year, and if things keep up at this rate, I’ll have earned some $20,000 more than last year. But there are no guarantees, especially since one of my major clients is in a vulnerable sector of the economy. I have the luxury of being able to save madly while still making $300 payments on $10,000 every month. After I get to at least 6 months of emergency savings (more if the economy looks really creaky), I’ll start paying down the debt more aggressively, with all of it gone before next spring if I keep earning at this rate.

    Given my specific circumstances, I would be foolish to focus on debt and debt only. An emergency fund of $1000, when my mortgage and taxes alone are $1100 each month, would be completely inadequate, and even 3 months worth of bare minimum expenses probably wouldn’t be enough to keep me afloat long enough to sell my house.

  43. Disagree. Living beneath your means is essential, but if you are paying 15 to 25% in interest on credit cards, how are you ever going to do that? Pay down that high interest rate debt now.

    Number one priority.

  44. Troy says:

    While I appreciate your opinion on the forecast of the US economy, I think you are incorrect.

    The research and facts regarding the upcoming wave of alt-a rate resets is coming. Starting in 2010.

    We are currently in a lull between the subprime resets essentially comingtoan end, and the Alt-A resets about to begin.

    To give you some scope, a MAJORITY of loans in CA in 2006-2007 were some type of ALT-A. This wave is about double that of the subpime collapse of the past 2 years.

    This creates and snowballs foreclosures for a variety of reasons, and the simple fact is until we stop the forclosure trend and the decline of home values the situation will not improve.

    And don’t buy any recent spin about the housing market bottoming out soon. It isn’t,and will not for sometime. Study statistical theory, reversion to the mean, the pendulum concept and you will see we have a way to go not counting what is yet to come.

    Most major national banks are near insolvent. 2 of the 3 largest companies in America are about to go bankrupt in 60 days. You know what’s happening. Don’t ignore it because of what you hope for. Accept it for what it is.

    Don’t let the sunshine fool you. I am not a doom & gloomer, but you cannot ignore facts, nor can you rely on economic abnormalities and outliers.

    The Calm Before The Storm. Plan for it.
    Control your time and your money. Know where it is and who is controling it.

    I think 8 months is on the low end. I would recommend at least 1 year. I would eliminate all debt possible, and most unnecessary expenses.

    Start saving.

  45. Razlan says:

    “…installing a programmable thermostat (and actually programming it)”

    I find this line hilarious. Appropriate of course, just…. funny. Heh.

  46. Kacie says:

    I certainly agree with Trent regarding the emergency savings vs. credit card debt. . .now here’s my question, however. Keep your emergency savings or “invest” it in refinancing your home? My husband is in the military, and we are homeowners. In 3 years, we will be reassigned, and thus will be moving and need to sell/rent our townhome, which we purchased 1 1/2 years ago. He is convinced that we need to refinance in case the housing market continues to sink and we end up owing more than what the home is worth in 3 years. His argument is that if this happens, we will need to rent, and the homes in our neighborhood are renting for about $600-$800 less than our monthly mortgage payments. If we refinance, our monthly payments will be $300 less and we will save that $300 between now and then as a buffer. Our “break even” point to recoup the cost of refinancing is 3 years, which is when we will be either selling or renting – if we sell, it is a complete wash. Of course, if we rent the home and own it as the years go on, refinancing becomes a more attractive offer.

    The problem with this situation is that it will essentially wipe out our emergency savings in the short term, which worries me greatly – we have pinched pennies for the last year and a half to create our emergency buffer. We would use these savings to cover the many costs of refinancing, meaning that if we encountered a true emergency before we were able to build up the cash again, we would have to rely on credit cards, which is absolutely something that I would not want to have happen. And personally, I think that we will be okay with the housing market, as we bought at a low time and have added a lot of value to the home in terms of upgrades and updates.

    What would you do? I would greatly appreciate any and all advice!! Thank you!

  47. I don’t really care for Suze’s advice– she is an entertainer first, financial know-it-all second.

    My thoughts are split the discretionary dough– half to debt repayment and half to emergency fund. Once the emergency fund is funded, target the debt with the full amount.

  48. Bryan says:

    Others have made the point, but I’ll simply quote the article you linked:

    “with 7.5 million jobs lost through the entire recession as the unemployment rate spikes to 10.5% in the middle of 2010. By the end of 2011, employment is forecast to total 4 million jobs below 2007′s employment peak, and the unemployment rate will still be above 9%.”

    I don’t necessarily agree with Orman, but economic “recovery” in terms of statistics doesn’t always equate to economic “recovery” in individual lives.

  49. Mike says:

    I like Trent’s advice, however, I would go a step further if you are feeling the money pinch. #1 it’s spring, don’t just trim your cable bill CUT THE CORD. I get plenty of HD channels just from my antenna, besides there is plenty to do outside now that the weather is getting nicer. #2 speaking of outside, it is yard sale time, so if you are feeling the money pinch take Dave Ramsey’s advice and have a yard sale. Like Dave says ‘if it’s not nailed down’. Ok, that may be too far, but almost everyone has something they can sell, use craigslist also, I have had real good results using that site. #3 think twice about going out and replacing light bulbs, and appliances just for the sake of purchasing them. If you are in a pinch now spending more won’t help. As things break down or bulbs burn out then replace them with high quality energy efficient items. The days are longer now and nights aren’t as cold we should all be using less energy.

  50. Melody says:

    No emergency fund or a small one is a reason that people often get into credit card debt in the first place. I used to make this mistake over and over again, paying off credit cards with a windfall or tax return, only to accumulate debt again when the car broke down or the plumbing failed. Now I have a fund for such contingencies and don’t need to use a credit card. So building an emergency fund first (maybe 8 months is too difficult, but at least 3 or 4 months) makes sense to me, along with no new debt.

  51. Trent, Im have to disagree with first half of your post here. I think you’re making the assumption that people who are bad with money just can’t make that change in the short term. Just because it took you years to change, doesnt mean that it will take others that long to make the appropriate changes in their lives.

    There are women in my meetup groups in both DC and Atlanta who’ve made the changes necessary to to build their emergency funds and pay down debt. Most within 2 months if not sooner. I think you’re assuming that this is just simply too tough for most but sadly the recession has made this issue a priority which kicked them into gear.

    I think we need to encourage people to think long term and frankly 8 months isnt long term when people are jobless for 6 months and longer. They need such an emergency fund to get them through meager times.

    What do they do when theyve lost their job, paid off credit card bills, have their credit limits yanked and little to no emergency fund?

    I think we have to be realistic. I dont agree with everything Suze says but I do think it wise to drill even hard to the masses the important of protecting themselves and their families by saving towards an emergency fund for at least 6-8 months. The reality is that when jobs are lost, most turn to credit cards, payday loans and the like to make ends meet. That isnt an option anymore for most because limits are being yanked or they’re maxed out. This is where having an emergency fund to get you through 6-8 months comes in. 8 months may seem long but it isn’t.

    At the end of the day, if I have to choose between debt repayment and keeping a roof over my head, the house wins. And, with jobs being lost left and right, the CC companies get the minimum with a little extra while I continue to put a chunk towards the emergency fund.

    I do agree with your points about being frugal, acquiring no more debt and spending less than you earn, but I think it more important to build that efund than to pay off the bank.

  52. Lenore says:

    The basis for Suze’s 8-month recommendation is it takes that long on average to find a job in the CURRENT economy. Things may be looking up, but if you were fired tomorrow (as a friend of mine was yesterday), it could be a long time till you find a replacement job. She advised against paying off credit cards because the companies are CANCELLING accounts as soon as cardholders reach a zero balance. They are arbitrarily cutting benefits, raising fees and reducing limits as they scramble to survive the recession. (Which they helped cause, poor babies!) So if you view your credit limits as an emergency-emergency fund of sorts, they may disappear just when you need them most. Maybe 8-months of savings is unrealistic for many, but the point is to STOP SCRAMBLING TO FEED YOUR CREDITORS before you feed yourself. Stow some extra cash away in case the worst happens, then go back to whittling away at your high-interest debts.

  53. Yowsers…8 months is a LOT of money to save up! Our family of six can live on about $2300 a month if necessary, so we’d need to save up 18,400 to live for eight months.

    We don’t have any debt aside from our mortgage, so we’re furiously saving as much money as we can, but even so it will take us a long time to save up almost 20K.

  54. mrsmonkey says:

    my instincts tell me it’s time to save everything you can get your hot little hands on, in case of emergency – which in this economy can be immediate and with no warning. imo, an 8 month emergency fund is MINIMUM. we are doing exactly what suze suggested, but we didn’t need her to tell us that. the big layoff at mr monkey’s workplace did.

    you’ve GOT to prepare for real possibilities. this is not to suggest no shopping, no spending, hoarding and other extreme measures which in themselves DO slow down the economy. but saving, shopping smart, holding off when possible is the way to go.

    right now, cc companies are showing no mercy to the consumer and so the consumer must show itself mercy. if they could, they’d call in ALL our debts in order to invest and strengthen themselves. so why shouldn’t we strengthen OURselves by holding on to our cash and investing in our future?

    should mr monkey lose his job, our creditors are not going to care and we are going to need to eat and pay our mortgage and utilities and other debts and necessities and he is going to need to find another job and none of that is cheap or something his credit card lender is going to give a hoot about. all they care about is their payment. so they’re going to get it. but right now…minimally while we pull together a serious emergency fund.

    the banks are benefitting (and no one is talking about this, btw). we are ALL saving. so they have these growing cash funds to invest and we are creating cash bases, which is a good thing and something we all should have been doing from the getgo.

    when this “crisis” is less critical, we can all go back to seriously paying down debt. but right now Americans need to think about getting through this, employed or unemployed. we all need to have a plan to survive intact, with enough reserves to invest in OUR futures (via finding new employment).

  55. @Lenore I totally agree with this:

    “STOP SCRAMBLING TO FEED YOUR CREDITORS before you feed yourself. Stow some extra cash away in case the worst happens, then go back to whittling away at your high-interest debts.”

    In a time when banks are seeking to increase fees and yank credit lines Im certainly not going to pay them first before I secure the roof over my head.

  56. Johanna says:

    Here’s another way to look at it: Trent complains that Suze’s advice is a long-term solution to a short-term problem, but paying down debt as a way to better your financial situation is also a long-term strategy. If you pay more than the minimum on your credit cards today, it will take at least 4-5 years for that money to be returned to you through reduced interest payments (possibly much more, if your interest rates are merely high rather than absurd). If you really think that this mess is going to clear up by the end of 2010, why sacrifice cash on hand now for something that’s not going to benefit you until 2013 at the earliest?

    And as Mike above points out, a lot of the frugality tactics Trent suggests are also long-term strategies. Buying energy-efficient appliances may save you money over the life of the appliances, but it will certainly not save you money over the course of a year, or even two years. It’s really pretty ridiculous for Trent to suggest buying new appliances, just a few paragraphs after saying, three times, in boldface, that your focus should be on the short term. It’s as if he just rattled off his standard list of “ways to be frugal” without even thinking it through.

  57. Michele says:

    I can’t watch Suzy anymore. She has become one of these screamers to me. Pointing, wagging her finger and yelling at this one mother on a show about telling her kid he can’t do this or that. I had to laugh when you referred to her as “very strong advocate”. She is getting paid to scare people. Her 8 month savings is a bit out of reach for me.

  58. Sandy E. says:

    It seems like a lot of people are missing the point. I saw the show that Suze Orman was on. She recommended 8 months of an emergency fund because she feels it would take at least that long to find another job in the event that you are laid off, and thousands upon thousands have been and will continue to be laid-off during this recession.

    And the reason she suggested paying just the minimum on credit cards is twofold: 1) credit card companies, by law, can’t take your house if you don’t pay them (like home equity loans can), so 2) after a lay-off, when you are cutting the fat from every monthly bill you’ve got to make that house payment, she recommended to go ahead and just pay the minimum on your credit card. She also said to STOP using your credit card too. And you might need that 8 month emergency fund to meet your monthly bills after a lay-off and before you get another job.

    On the show, there were several couples and one of each had been laid off and were struggling to meet their monthly expenses and were fearful of losing their homes. It is those people that she was giving this advice to. Ideally, they should not have had credit card debt. If they get re-hired, and build up their 8 month emergency fund (in case they get laid off from that job too), then they should pay their cards off. In that situation, and for that audience, her advice is sound.

  59. mrsmonkey says:

    one last thing:

    like some others here, my son and his wife would routinely pay down all credit with his bonuses. they nearly paid off two houses and had no credit card debt carried over.

    as they usually did, recently they paid off all their creditors, and their creditors immediately closed their credit lines which were based on equity…their houses had lost value so they shut off their equity lines and now they are “cash poor” with two houses, two mortgages and a housing market stuck in limbo. plus much of their investment in their homes is gone, thanks to plummeting property values. their homes were NOT overvalued…right now they are grossly undervalued since they’re in the jumbo mortgage league and the only people looking for these kinds of homes, are foreigners looking for cheap deals. there is NO credit available in the US righ tnow.

    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.

  60. Sandy E. says:

    Suze Orman also said, unfortunately, that the recession won’t clear up until 2015, in her opinion; sadly, I agree with her.

  61. Dan says:

    So, what if Orman is thinking that due to all the monopoly money being pumped into the U.S. economy, we’re about to see the value of the dollar drop like a rock and inflation skyrocket — would prices therefore rise and wages rise as well (while the debt you owed basically remained the same)? This is a question, not a statement. I’m curious how the U.S. plans to keep that from happening as, my understanding is, they drop the interest rate to help control inflation…the problem is, it doesn’t have much of anywhere to drop now. Of course, add in the possibility of a world curency (no longer the dollar) and that opens a whole new world of questions.

  62. DB Cooper says:

    Among the reasons Orman gives for reducing credit card payments to minimum and building an eight month emergency fund are the actions that card companies are taking:

    “The problem is that most credit card companies are either reducing your credit limits, raising your interest rates, and…”

    If card companies are “raising your interest rates” it’s a very bad time to be reducing your payments to the minimum. It will take years and years and years to pay off those debts. Further, if they reduce your limit to below your current balance, you’ll be hit with all kinds of fees.

    I say hit ‘em hard and hit ‘em often – and eliminate them altogether!

  63. Sally says:

    We have enough to pay off the debt with a little bit of a cushion- but it the card gets paid and then we need the emergency fund…then what? Right now I can pay more than the minimum (it will all be paid off towards the end of the year) and I still have a cushion.

  64. If you’re still in good financial/employment shape, why not open a new credit card account now with a smaller, local bank or credit union that didn’t get into trouble playing the derivatives game?

    A lot of them are still providing credit to borrowers with good credit histories. So if you can get one through them, you can pay down your credit card balance from the big banks (who are in many cases now charging a *lot* more for carrying that balance) and still have another credit line to resort to if you need it.

  65. Deb Solko says:

    I think you are totally missing Suze Orman’s point. Think about it – if you lost your job tomorrow what would you rather have? A somewhat paid down credit card, or money in the bank? You have to think of it in terms of no money coming in. This is not your usual recession. If you lose your job – which is a very real prospect – it is extremely likely you will be unemployed for months or even over a year. How would you feed your family after unemployment runs out? There are things that Suze says that I don’t agree with, but this is not one of them.

  66. Matt Jabs says:

    Nothing has changed, it is still equally important to both save for your Emergency Fund and pay down your debt.

    The best thing to do is obviously based on each individual situation, but I believe everyone needs to have a system & plan in place.

    Here’s what I do:

    After paying my monthly living expenses, I have a certain amount of money each month available to put toward both my debt repayment, and my EF savings. I’m currently on the 75/25 plan, meaning I put 75% of the available funds toward my debt repayment and 25% toward my EF savings.

    DebtFREEk!

  67. Kelly says:

    We’re using a method that I cribbed from FrugalDad.

    We are saving all our money in an emergency fund account, and when we have enough to pay off a debt in full we do so making sure to leave at least a $1000 cushion.

    Right now this method is working well for us. The debts we are tackling are low or 0% interest so this method gets us debt-free quickly but also helps us feel safe in case of an emergency.

    Fortunately for us hubby’s job is super secure. (they wanted to promote him, but the company had a promotion/raise freeze.

    I do think Suze’s advice is somewhat remiss. I mean if I have $500 in min. debt payments that’s an additional $4000 I need to save in my EF. I would rather slay the debt, so I don’t have to save as much.

  68. Sandy E. says:

    @ Sally — your situation is exactly the situation of another woman on the show where S. Orman advised her to pay the minimum payments on her card. Your “then what?” is precisely the point of Suze’s changing advice in this economy.

  69. Mike says:

    America’s First Housing bubble in 1819. Quite an amazing read, and similar to today except their solution to the problem is the opposite of what the governments of today are doing, which is making it worse.

    http://mises.org/story/3395

  70. Tony says:

    Unless there is a huge difference in interest payments debts should be repaid in the order of smallest balance to largest. This advice meshes better with human behavior.

  71. Tony says:

    Unless there is a huge difference in interest payments debts should be repaid in the order of smallest balance to largest. This advice meshes better with human behavior. Something Suze Orman doesn’t get.

  72. MelodyO says:

    As others have said, Suze was cautioning that the credit card companies could very likely close down the card if you paid it off, and I think that’s a pretty important point.

    Now, if you really want to point out something wacky that Suze Orman said, she also advised on that show to save HALF your income every month so you’d be used to it if you or your partner got laid off! What I want to do is live off half of Suze’s income.

    FWIW, based on her advice on that show, we stopped putting extra principal payments on our mortgage for now and are saving the money instead.

  73. Johanna says:

    @MelodyO: Saving half your income is not really that wacky. From the comments section for Trent’s post of March 18, 2008, it looks like there are a lot of people who are doing just that. Sure, it is not possible for everybody, but for many people (who make a lot less than Suze does), it is.

    And the great thing is, if you are living off half of your take-home pay, you can accumulate an eight-month emergency fund in… eight months.

  74. partgypsy says:

    Where I agree with Suze Orman. Cash is king; no matter how you organize your finances it is good (especially so in these times) to have a cash cushion on hand. Instead of putting every single dollar towards debt repayment maybe it should be 50/50, with half going towards emergency fund. Where I disagree with Suze is the problem with credit cards is that it is not just the people who are paying off their credit cards whom they are closing accounts. They are closing accounts for people who have been making regular payments, just that the companies decide they are now too risky. Who are these people? Oftentimes they are targeting people who are close to their credit limits who only make the minimum payment (ie. what Suze is advising!). The credit card is then closed and you have to pay in full! Not a good situation.

    Second even if your credit card does not get canceled Suze is in essence asking these people to ignore credit card debt. Whether it’s a good economy or a bad economy these people are going to eventually have to deal with their credit card debt to get a handle on their overall financial situation.

  75. monogirl says:

    Thanks for addressing this issue Trent.

  76. Sarah says:

    partgypsy: You don’t have to pay in full if the issuer closes your account. I don’t know if there are exceptions for default, but in the scenario you outline (person near credit limit making minimum payments), closure of the account just means no more use of the card.

  77. didi says:

    Has anyone heard of the book – The Great Depression Ahead by, Harry S. Dent? He is a long time studier of economic cycles and also does not believe the economy will sustain a rebound until much later.. believe it was 2015 he said as well. He also predicted the Japan crash before 1990 and the stock market fail in 2008. Just wondering if anyone read the book also and what they thought.. I am luckily a few months away from being debt free (except mortgage) and have a good emergency fund under me already but I will definitely be building it.. I don’t think Suze is all that wrong in advising everyone to build up a strong emergency fund… if you lost your job think of the peace of mind you would have in knowing it was there. I too saw the show and while she may not be right I think she was honest and truly believes in what she is advising. Trent has always offered good advice also and I have been reading for a while now but I think it may be too optimistic to think that a sustained rebound will really come about in 2010.

  78. m says:

    Sorry I agree with Suze on this one, what good is paying off your creditors if you lose your job then your home. Will they say “hey heard you fell on hard times why don’t I give you some credit to carry you through another month”, not. Cash is king, and if you lost your job, get sick or something else. Trust me a friend is in this position right now, worked like crazy to pay off the credit cards only to have 2 with the highest credit line closed, you can’t depend on cc as an emergency fund. She so wishes she had paid the minimum and put the rest in savings, the writing was on the wall folks, you can’t have it all. Hubby and I talked with friends about this 4 years ago, housing bubble, people getting new cars at 0% interest, in debt so far they would never see daylight. Funny our friend who is an economics teacher said, banks would be in trouble, car market would drop and people would lose their jobs, then their houses. How many new cars can people buy? Our bank wanted to lend us twice the money we wanted and then a second mortgage to cover closing costs, we didn’t have any other debt we could afford it, glad we had the common sense to figure our own debt the income ratio. Thing is, cut the cable, use a pay per min cell phone for emergencies, stop taking the Sunday drive to Sams or whatever you always walk out the door with something, eat at home, turn down the heat/turn up the air because these are not the necessities of life. 1. A roof over your head. 2. Utilities, gas, electric, water and a land line with min bells and whistles. 3. A way to get to work, hopefully leaving the car in the drive. 4. Clothes and food, put the rest into savings. This is how we were raised, buy with cash, if you didn’t have the cash you didn’t need it, credit only in an emergency. I’m 45 now and I spent my 20’s-30’s throwing money to the wind, charging up a storm and one day my Mom called and said even though it wasn’t her business, how much did I have in savings? I was embarrassed to say “what savings” and that one phone call changed everything. I looked at all the junk we had bought, bills we had, and waited until the weekend to talk to my husband and tell him things had to change. We are lucky, if either one of us loses our job things will stay the same, if both of us lose our job we could make it a year living off savings, longer if we cancel the luxuries, like cutting the basic cable completely, canceling magazines, selling off some stuff, stop eating out, going to the movies. Suze was talking to people on Oprah who couldn’t even make it a month and were going to lose it all and letting the rest of us know if it could happen to them it could happen to anyone. Another show had people living in tents who had never been unemployed in their lives. Sorry Trent, I have to go with Suze on this one.

  79. partgypsy says:

    Oops I thought when they closed your account you need to pay it off in full. Maybe Suze just needs to make up her mind. In this Jan 2009 article she says the number one thing you need to do in 2009 is pay off credit card debt.
    http://www.msnbc.msn.com/id/28544648/

  80. MM says:

    Dave Ramsey has been recommending the same philosophy as Suze in the recent economy. He’s suggesting that if you’re atleast 30% sure that your job could be eliminated:
    - Stop your debt snowball
    - Only make minimum payments
    - Put all the extra cash in savings
    - When you feel that your situation has changed to feeling atleast 70% sure your job is safe, take your huge savings, minus your $1,000 emergency fund, and make a whopper payment to re-start your debt snowball

    Up for discussion is the amount to accumulate. As many commenters are saying, it all depends on your personal situation.

  81. Jackie says:

    I think you’re right about this one, Trent. My husband and I actually did something similar to what you talked about in third paragraph from the end. When we first caught wind that my job could be in jeopardy back in December, we were about $4,000 from paying off our last credit card. Instead of continuing to throw all of our extra money towards the card, we started beefing up our efund. A few months later when I had survived the layoffs, we took the money we had saved and paid off the card. Having that money in savings helped give us peace of mind during a stressful period in our lives and was still there when we needed to get rid of the debt.

    Having been there myself, I agree with you that 8 months of an efund is just too much for someone in debt to handle on top of the thought of repaying the debt. Someday, just not immediately.

  82. tom says:

    One thing that will get you in trouble with people is suggesting the economy will start to recover in 2010, and you cannot make any guarantees on that so please don’t mislead people.
    Also, this all depends on someones situation in terms of how much of an emergency fund they need to have.
    It differs for someone living at home versus someone having a mortgage. They still need an emergency fund but depends on the amount just in case they lose a job or something.

  83. Katy says:

    I soundly disagree with your analysis. Every article you referenced showing that this is a short term problem has no actual data proving this. Its all forecasts. On top of that, the actual data for the first quarter of 2009 was much worse that your reference articles’ forecasts.

    Look, I agree that Suze’s new strategy is not for everyone. It is especially not for those people who live in areas where the job market is improving. However, that is not the case in the majority of the country and it is absolutely not the case in urban areas. We have been hit hardest in urban areas, and as rural and suburban areas recover, we in urban areas are forecast to see hard times until 2011 or later.

    I’m not even going to go into the ways they have been tweaking statistics to make people feel better (check http://www.shadowstats.com for estimations of actual statistics) or any of the other deep economic stuff. Let me just say that as far as I’m concerned, the only people whose forecasts are worth listening to are the ones who saw this mess coming in the first place, and very few of them see it ending in 2010.

  84. SC says:

    I have to side with Suze. In this economic climate, an inadequate emergency fund bothers me a whole lot more than my credit card debt does, and that is why I am making minimum payments on the debt and putting the rest toward the EF. Whether or not I’ll make it to the magical 8 month’s of expenses mark any time soon is immaterial at this point.

  85. 4DM says:

    I have 5750 credit card debt @1.99% for life of the loan and 32K interest only equity line of credit (which I switched to interest only from fixed interest) since the rates are so low. I was planning on paying off the debt, however due to layoffs at my work I soon realized I need to save towards emergency fund than to payoff debts. In the last three months I saved up 11K (thanks to taxt returns, which is equivalent to 3 months emergency fund).
    I think our company is bare bones now in resources and I think it will take me 3 to 5 months to find a job in this economy for my skills.
    I need your expert comments, if you were in my situation, which loan you would go after first? I am not making any new debts and cut down all of my expenses (switched to pre paid cell, cancelled Gym membership, using magicjack for long distance, basic phone packeage, negotiated high speed DSL to 50% I need internet for my work)

    Thanks in advance for your advice.

  86. Bill says:

    For most individuals I would say Suze’s advice is wrong – BUT there is one situation that this advice would make perfect sense: If your credit card company is going to forgive some or all of your debt if you lose your job. The big automakers have already announced programs like this and it would be a small stretch for bailed out financial companies doing the same thing.

  87. viola says:

    I think suzy finally has it right, and at least she’s a big enough person to changed her mind publicly if it’s for the good of her fans.

    In today’s economy, many people that would’ve been fine with 3 months saved a year ago will now need much more when they can’t find a job among mass layoffs and harder-hit economic areas. Or a 2-income household goes to zero. Or they become disabled and cannot work full-time.

    Yes 8 months is a lot of money. That is also about the time it takes to get foreclosed on. I’d rather have, and do have, the 8 months saved.

  88. Snoop-Diggity-DANG-Dawg says:

    I think better advice is to get out of variable interest rate debt (like credit cards), and beginning to pay THAT down incrementally.

    When interest rates go through the roof, it’ll be much easier to pay down that fixed-rate debt.

  89. Rick says:

    I think Trent is right on this one because it is going to take a REALLY long time to save up 8 months’ salary, and someone with CC debt would be paying a LOT of interest to build up that savings. Consider this- if you save 10% of your salary each month it would take 80 months or 6 2/3 years!
    Let’s look at it another way- if you had no CC debt, and no emergency fund would you take a cash advance equal to 8 months of income on your CC to have an immediate emergency fund? Keep in mind that at 20% interest and paying it off over 80 months would cost you a bit over HALF A YEAR’s salary! Even if you could get a 10% interest rate that cost is still about ~30% of a year’s salary.
    Ouch, no thank you!

    -Rick Francis

  90. Dan Koifman says:

    She changed her advice because CC companies are now revoking credit limits and closing down accounts. American Express even paid people $300 to close their accounts.

    For folks that are totally living on credit cards, and cannot make ends meet without it, then her advice has more merit. But otherwise, get out of debt and save.

  91. Lisa says:

    Sometimes people get tax refunds, bonuses, etc. Sometimes people sell stuff to raise cash for an emergency fund. It seems the time required to accumulate an emergency fund could be shortened a bit by putting that money aside, as well.

  92. steve says:

    The fact that the rate of increase in unemployment numbers has slowed slightly does not mean we are “near the bottom”, and once the jobless numbers flatten out does not mean that, all of a sudden, we are going to start increasing the number of jobs at, say 600,000 per month (last month’s job loss figure).

  93. Ray says:

    Suze Ormans investing advice will drive you to ruin trust me.
    All of the heavy players warn about her tactics and advice.

  94. lily says:

    I have to agree with suze that making sure the emergency fund is padded is extremely important right now. job loss is NOT slowing down. in some sectors, it’s just getting started. the recession could be half-over, or it could go on for years. expecting economists to be right about a fast bounce on the economy is just folly. you absolutely need to have enough money to cover you FULLY for at least a few months if you lose your income. optimism has its place, but the housing crisis was caused in part by people being over-optimistic about their salary prospects. if 8 months is too much, then just do your best and sock away what you can. but do it.

  95. Johanna says:

    @Rick: A crucial fact that you’re overlooking is that if you’re saving 10% of your salary, then your expenses are only 90% of your salary, so you will accumulate eight months’ expenses in 72 months (6 years), not 80. Not such a big difference, but if you can save 20% of your salary and live on 80%, you will save eight months’ expenses in 32 months, or 2 2/3 years – by saving twice as much, you reach the goal in less than half the time. Saving 25% of your salary (not a ridiculously huge percentage) will get you eight months’ expenses in 2 years (not a ridiculously long time).

    Also, Suze’s statement that eight months is ideal does NOT mean that if you can’t get up to eight months, you might as well not even try. Eight months is better than four months, four months is better than two months, two months is better than nothing.

  96. Joy says:

    My question is: Is it okay to borrow money to start a small side business that will hopefully go towards completing your emergency fund?

  97. kitty says:

    Under normal circumstances, I’d be all for getting rid of high interest debt ASAP – why waste money on interest? After all, if you pay off your debt, emergency happens and you borrow again, you still would have saved a whole lot of interest. Just a few days ago, I suggested paying off credit cards asap.

    But after having read Suze rationale above, I think she has a point. The logic of repaying everything immediately even with the last pennies you have to save money on interest works if you can borrow again in an emergency. But what if you can’t? With credit cards being closed, this may be a problem. This is why she changed her advice, and I think she may be right. Ideally, one would transfer to 0% so that one could keep money on savings yet not waste money on interest. If you cannot do that then, yes, you’ll waste money by not repaying the debt. But there is a risk of staying without cash nowadays too. BTW – I’ve never had consumer debt personally, so I normally always think about the bottom line. But in this case, I think it really depends on individual situation.

    As to when economy starts to recover. Nobody knows. One thing for certain – the employment recovers last. So even if the economy starts to recover in 2010, it may be a while before unemployment bottoms out.

    Those who worked in IT or software R&D back during the internet days remember that it took a very long time, longer than even 8 months for most of those laid off to find another job. So economy is an important consideration.

    “Ugh, my company used the scapegoat of the Economy to only give hourly employees 40% of the typical raise (these people only make $9-$12 an hour). We experienced double-digit growth last year. How does that add up?”
    Be happy you have a job. My company is profitable too, yet they laid off a bunch of people last month and will lay off more in June. Every company is cutting costs – keep in mind that past profits are in the past. Currently most companies don’t see the future clearly, so they prepare themselves. Plus, the credit is still tight, so companies hoard cash. Those companies who have cash also see opportunities of buying other companies, they need cash for it too. Bottom line – be thankful you have a job. I’d be surprised if I get any raise at all this year.

  98. n-ray says:

    I have been following Suze’s advice for the last few years and since then I paid off all my credit card debt and saved 5 month emergency fund so far.

    Her advice for a 8-month emergency fund is not new; she has been advising that for a while. Obviously no one will build their 8-month fund overnight; it takes some time but it is not impossible. I think it would be a mistake to dismiss that idea simply saying it would take too long to save.

  99. danahyatt says:

    Sorry Trent, Suze is right this time. If one still has credit card debt now, it is futile to pay more than the minimum. I followed Suze’s advice and paid off my cards a year ago. The banks are in trouble so they raised the interest rate on cards in November. I got a notice back in November from Chase that said my interest rate was now up to 21%. I called and told them I was not using their card for anything. All of those who have balances now must make-up the difference for the health of the banks. Cash is King!!!!

  100. Shak says:

    While paying off credit card debt is crucial, it is effectively an abstract concept when compared directly to having access to REAL money.

    Suze’s advice to shift your focus to stacking your cash makes absolute sense, the key is finding your sweet spot (which for most of us ISN’T eight months). Being debt free yet broke is quite a dangerous predicament in this day and age.

  101. Rick says:

    @Johanna: you do have a good point that the less you can live on the easier saving 8 months of expenses becomes. However, I am skeptical that someone with significant CC debt could manage to save 25% of their salary. I do think 10% is a reasonably achievable number.

    I don’t think saving up a small emergency fund is unreasonable but I would put paying off the high interest debt before such as large amount.

    -Rick Francis

  102. Sandy E. says:

    I was really surprised to read an article today at http://www.msnbc.com entitled “Economy leaves millions of drivers uninsured — 1 in 6 won’t be covered by the end of the year). And it falls in line with what S. Orman was suggesting re paying your minimum on credit card payments right now. Apparently, and this is shocking, millions are cutting back or dropping their auto ins. to ssve money during the recession. They can’t afford their monthly premiums – even the minimum liability coverage required under State law. Food and rent are more immediate concerns. Suze was addressing people on the show who were about to lose their homes to just pay the minimum on credit cards. Apparently, many already had dropped their auto insurance!!

  103. Sandy E. says:

    I was really surprised to read an article today at msnbc.com entitled “Economy leaves millions of drivers uninsured — 1 in 6 won’t be covered by the end of the year.” And it falls in line with what S. Orman was suggesting re paying your minimum on credit card payments right now. Apparently, and this is shocking, millions are cutting back or dropping their auto ins. to save money during the recession. They can’t afford their monthly premiums – even the minimum liability coverage required under State law. Food and rent are more immediate concerns. Suze was addressing people on the show who were about to lose their homes to just pay the minimum on credit cards. Apparently, many already had dropped their auto insurance!!

  104. Melaniesd says:

    I have to agree with Kitty & Sherry.
    Last year I started saving $30/pay into an ING act towards a future purchase. Now, 15 months later I have almost $1000 saved! I don’t miss that money. I don’t touch it either.
    My husband & I have about $11,000 in debt outside of our mortgage & car loan. I could have put that towards the debt, but now my husband will be laid off as of the end of May. I am grateful I have that $1000 saved! It won’t get us far, but atleast it will pay the mortgage for a month if we need to use it.
    I have to agree with Suze’s advice. We all still need to pay our debts but we need to save to. It feels so good to watch my savings grow. I am trying hard to avoid further CCRD debt and focus on savings AND re-pymts.
    I currently work 27 hours/wk and will return to full time hours once DH is laid off. If we are fortunate enough for him to return to work in the next year, I will continue to work full time and put the extra income towards both debt repymt & savings. I can’t wait to get rid of my car pymt!!

  105. GREENI$BLACK says:

    I always loved Suze’s advice EXCEPT her point of 8 months expenses for emergency funds. I don’t know when I will ever have that kind of money sitting around JUST IN CASE! Similarly I always followed her advice and paid my credit card debt as much as I could. I have been in the practice of building up my EF to about 1K and then taking $500 to put towards my CC debt, so the money is there for a time, just in case, and then when I am OK for another month, I take it away. Seems to be working for me, because I think if right now I stopped paying my CC’s and saved up a bunch of money, I would feel so discouraged about getting rid of CC debt, which many say is the NEXT CRISIS to come!!

    great post :)

  106. Marcus Murphy says:

    I think the key that we all need to remember here is that everyone needs to find the balance of debt and emergency fund. Me personally, I am fine with only a few thousand in an emergency fund, and would rather pay off the high interest debt I have. But I am comfortable with this for 2 reasons. #1 I am a single male who lives alone with no dependents. #2 Trent’s post not too long back about the Jack-of-All-Trades fits me quite well. I have many marketable skills in many areas, many that make me more self sufficient and able to draw money in from many areas. So a job loss won’t really hurt me too much compared to other people. The key is to find the right balance in YOUR life.

    Good luck everyone =)

  107. luvleftovers says:

    About a year and a half ago, I suddenly got a ‘bad feeling’ about finances. I had been attacking my debt with a vengance for about a year before that. Something made me cut back a bit on the debt payments to put more money in savings. I’m so glad I did. On Jan 30, I was laid off along with 300 coworkers. I had just about 4 months of take-home pay in the bank, and then added my severance.

    I am fairly relaxed about my financial situation. All my bills are paid on time and I pay just barely about the minimum on my debts. It’s a bit dissapointing not to see the balances falling like the did last year, but they are not rising either. I am collecting UI, and with my emergency fund, I know that I could survive at least a year or more without a job. And the sad truth is that it could take that long (or longer) to find one. The peace of mind is priceless.

    In this economy, it’s crucial to have cash in reserve. It’s different for each person’s situation, so they will have to figure out their comfort zone on their own.

  108. If you’re seriously thinking about trading debt (paying off) for equity (building up cash in an emergency fund) then just refi your current home (if you have equity in it); lock in the lower interest rates.

    If the economy improves in 12 months, you can pay down some of your mortgage (better yet, more expensive credit card debt) or, even better, put the money towards a long-term investment.

    The total ‘cost’ of this peace of mind is just 12 to 24 months interest on 8 months living expenses … a lot easier/quicker than saving it up (and, what happens if you lose your job before you do manage to save all that money?) …

  109. Bill in NC says:

    Cash is king.

    Jobs are iffy.

    And many creditors are about to find out exactly what “unsecured” means.

    In this economic crisis, tens or even hundreds of billions of dollars in unsecured debt will soon disappear without the lender receiving one thin dime.

    No matter how many calls the collection agencies make.

  110. Kevin in CO says:

    I was laid off from a position and wasn’t able to find a replacement position for 18 months. I don’t normally have a difficult time finding work as I’m highly skilled, though at that time, the market was flooded and I admittedly could have done better if I knew more.

    I was just laid off again last week as a result of my former company cutting 40% of its workforce. How long will I be out of work? No clue. Am I paying down debt right now? Yeah – right… I am doing what I can to keep my expenses as low as possible so the $1 over minimum is great for credit but that’s all I can afford.

    My confidence level is still high about finding a replacement position, but I have little doubt that my next position will be a good 20% less than my prior position in today’s market. How big is my emergency fund now? Three months. Do I feel confident with that much in reserve? No.

    Evaluating Suzie’s advice, I agree with the essence of what she was saying. Any time you’re in a position where there’s a high probability of an extended time out of income, there needs to be a real cash reserve to fall back on. Relying on credit as an emergency fund is about as bad as relying on a job to provide income – you don’t always control its availability.

    How much savings should a person keep in an emergency fund? That depends on the individual and that person’s needs along with the needs of those that depend on him/her. Everyone talks about having an emergency fund for when you’re out of work. What about for when you’re “under-employed?” Under employment can be worse in some ways than being out of a job because you’re not making enough to sustain a lifestyle you’re used to while expecting to be able to find a replacement position soon that will pick up the slack. The problem is – the longer you’re under-employed, the harder it is to find employment at the level you’re accustomed to. In the meantime, you’re burning up your emergency fund maintaining a lifestyle your income doesn’t support – hence, you’re outspending your income.

    I agree with Trent in many ways, but I believe the essence of what Suzie was saying is this – the old idea of having three to six months of income stored up in ready reserve is no longer enough. With the current economic situation, we should reconsider having larger reserves if possible. She’s not saying stop paying down debt, but asking us to make sure our reserve pool is large enough to support us should we loose some or all of our income for an extended period of time.

    The best advice continues to remain the same – spend less than you make and save or invest what you don’t spend. The reason for having an emergency fund is so you have something that will replace lost income temporarily and so we don’t have to tap into investment for retirement.

    My favorite financial advisor – Robert Kiyosaki (Rich Dad, Poor Dad) talks about this too. Paraphrasing, He underscores that an emergency fund isn’t there to keep up with inflation or make us money. An emergency fund is there like a safety net like that of a trapeze artist. It’s there to prevent financial injury. The size and strength of the net depends on the area of risk and the potential height of fall. The same is true of an emergency fund – the bigger the area of risk (how long will the fund be expected to last) as well as the strength of that net (how high of an income can it replace for that period) should be how we determine the size of our emergency fund.

    We’ve all heard – it’s not the jump that hurts, it’s the sudden stop at the end. An emergency fund takes out some of the sudden in that stop.

  111. Ash says:

    Eight months? We’re on our way to a twelve month — yes, twelve month — emergency fund. I know most people will think we’re nuts! My husband works in investment management at a bank — a bank that is laying off 5000+ people over the next couple years. He is *supposed* to get a year’s severance if he gets laid off. But I’m not counting my chickens until they hatch. If he doesn’t get laid off, great. But if he does, we will be able to live for a while. We have two young children and, for my own peace of mind, I have to know that we have enough saved up to support ourselves and pay the mortgage. We have no credit card, debt, though, so I don’t know how much this adds to the Suze debate.

  112. Carol says:

    I had not heard of a creditor arbitrarily cancelling your account after it is paid in full (mentioned in some postings above). How odd is that? I would think they would love to have your business if you are good pay. I think you could always get another credit card in a blink of an eye. If that’s what you’d want to do. Anyway, my vote goes to pay off debt first.

  113. Sandy says:

    This has been really interesting reading…it’s almost 2 months after Trent wrote this, and jobs are still being lost, with GM’s and Chrysler’s bankruptcies leading the way. I really think it will take a long time to get out of this situation, and yes, for me, cash is definately king.
    I appreciate all the authors and financial gurus and their comments above, but my financial guru came in the form of something I read in the Little House series that I read as a child, and read to my daughters. It’s this: Make hay while the sun shines. A hundred years ago, it meant literally that (if you are a farmer, it still does mean that!). Today, it means, to me: If you are making good money at any point in your life, THAT is the time to SAVE,SAVE,SAVE. Recognize that times might not always be so good, and put money away for those days…unfortunately, we all are likely to have a rainy day.
    For my family, we’ve tried to be as frugal as possible for years, and sock money away, and carry no debt.(outside of house and car mortgage, and college loans). Getthem paid off ASAP.
    For my girls college savings, which we don’t count in emergency funds, about 2/3 of their savings is in cash equivelants, with the thought that if we have an incredible rainy day, we can easily tap into that cash, too. For EF, we have about 11 months of living expenses in the bank, and if we had to use their college, another 8-9 months.
    I’m with Suze…if you have no money saved, let me tell you…it’s a great feeling to know that cash is there if we need it. Credit cards are not savings accounts.

  114. Kellygirl says:

    I’m amazed by how down many folks are on Suze’s idea. Until very recently I basically had an empty savings account and was living paycheck to paycheck. I survived a mass layoff of over 1000 people at work last year, and our economic situation remains tight–no more 401k matches, salary freeze, etc. I started taking Suze’s advice and have found lots more ways to save funds that are now sitting in my savings account. And I just recently paid off all my credit card debt too. But if I had thrown a ton of funds at credit card debt and didn’t worry about trying to build up some savings, and then got layed off, I’d be in a world of hurt. And yeah, 8 months of savings does sound like a lot, but when you do find ways to cut other expenses and wants rather than needs, it adds up fast–got almost 7K stashed just from this year. Suze works for me. We are in uncertain times, and Suze is playing it safe with a larger emergency savings fund which can help folks remain fluid and in control should they meet financial adversity. I feel much more comfortable knowing I have something to fall back on. And 8 months of savings should not be a long term goal–our retirement should be a long term goal. We have been very poor savers overall in the US, so this is a fine opportunity for all of us to course correct.

  115. Ashley says:

    An interesting thread. I don’t particularly care for Suze, but her revisions to reflect saving more at the the expense of paying less on credit cards has some merit.

    I like the concept on living on exactly half of what you do now. It will, of course, require deep, deep cuts in the household budget. It will also cushion the fall, financially and psychologically, of a total job loss.

    We are working towards this objective. We ditched the second car. We sold the dryer on Craigslist. We don’t have cell phones, cable or high speed internet. No dishwasher. No microwave. Beans & rice. Heat with wood.

    We adopted a “if you don’t want the bill, don’t use the service” mentality. It isn’t easy, but it is empowering.

    We apply the savings towards debt and savings.

  116. deRuiter says:

    “The rate of job loss is slowing down across the country and in some areas is already beginning to rebound.” Folks, the job loss rate is slowing because all the superflouous and marginal workers have been let go. Businesses are down to a bare bones staff with people having to do more tasks than before the economy tanked. Businesses have FEWER employees now to do the same amount of work. Businesses now struggle to accomplish their basic function with fewer employees. The reason the job losses are slowing is that we are now down to the core employees, and if they are let go, the business must fold, which is happening in many cases. A “jobless” recovery can not be a recovery because there are fewer customers with less money to buy. When your stocks get back to what you paid, or a bit higher, consider selling them! The next recession is just around the corner.

  117. J.P. Haeg says:

    Trent,
    A related comment/opinion:
    Instead of building a large emergency fund in cash, I personally would slowly increase my Roth IRA contributions. I consider money tied up in a Roth IRA account equivalent to an emergency fund, because the initial investment can be cashed out at any time without penalty, and I’m less likely to cash this out. Note: I invest my Roth in a conservative no load balanced mutual fund with a low expense ratio, but it could be invested in a money market.

    I also agree with Trent that 8 months of cash is extreme. I would aim for about 1 month of cash, and then start paying off the credit card debt.

  118. I think that it is wise to have the 8 month fund or at least 6 months because the time it can take to find new work as well as unexpected situations. For instance, you can need to go to ER, repair your car, have dental work or so many contigencies that can require a few thousand dollars. Of course, covering bills itself can be a challenge.

  119. Tim says:

    Well, it’s July 2010- has the economy rebounded yet?
    Seems less “short term” than you had claimed.

    Unemployment is about even still. Maybe that 8 month Emergency Fund wasn’t a bad idea. Especially in states where unemployment is so high- 1 month’s worth, or Dave Ramsey’s $1,000 just wouldn’t cover it.

    I would love to see this site take a look at it’s past advice to people and how it measured up.

  120. anita says:

    I think Suze Orman was right. The economists that thought there would be improvement in 2010 were and are delusional. There will not be any improvement ever. This is the new normal.

  121. Sue says:

    I’ve compared Dave Ramsey and Suzie Orman’s principles–have found that dave needs to revamp his outdated ideas–I’ve followed Suze’s for years–mainly due to the fact she pretty much saved my life several times–not only is putting money aside for yourself or as she puts it “paying yourself first” the smartest thing a married or single woman can do–if you are unexpectedly unemployed and have to wait for unemployment to kick in–you can still take care yourself and your family while looking for work. Women should never rely on their husbands to support them–this is and should be your first responsiblity to yourself and your family. My husband says this also alleviates stress on him as a sole supporter of the family as well. Someone asked me the other day what’s the secret to 25 yrs of marriage–so easy–compromise. Also, if you can’t afford it, don’t by it and don’t buy the big car/house just to impress others. Build a retirement now–today’s reality check–no one is going to support you but yourself.

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