Liz Pullman Weston writes that Suze Orman is giving out bad advice right now. So what advice is she doling out that is so awful? Well Suze is suggesting that people stop paying off their debt, and instead start stockpiling cash. Suze says, now is the time to be paying the minimums on your debt and instead make it a top priority to save an emergency fund.
But why did Suze sugest this versus before where she said pay off debt and borrow if you run into trouble? Well the problem is right now it’s getting harder to borrow money. Lenders are being a lot more careful and if a family runs into financial difficulties they could find it impossible to borrow money to survive.
So why does Liz argues this is a bad idea. Paying the minimums right now might make credit card issuers nervous, and attract undue attention. She says that you could be labelled “high risk” and your interest rates could rise. It could also cause you to not have more access to credit by being labelled high risk. But she says the advice of stockpiling cash makes sense if you are about to be laid off, on the financial brink, or your accounts have already been frozen. Rather Liz suggest staying the course.
So what’s the right thing to do? I think people should have some cash on hand. A few months worth at least. Why? Because when you lose your job how will you pay for your rent, utilities, car insurance, car payment? Yes everyone should be debt free and living within their means. But for many perhaps they are trying to turn it around and live debt free but are still in DEBT! Thus they need to consider how to survive when they have monthly obligations?
I think that saving cash and paying off say a car or credit card in full is a good alternative to not stockpiling too much free cash. But right now if you lose your job, not having the cash to make a mortgage or rent payment could cause even bigger problems.
What do most people suggest for those in debt?
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14 responses so far ↓
1 FabulouslyBroke.com // Apr 30, 2009 at 11:44 am
All I want is for people to just be realistic.
If 8 months is going to take you 6 years to save and you’re doing debt minimums in the mean time off a high interest credit card.. HELLO?
Just save 3 months as a minimum, maybe 4 if you’re more nervous, and pay your debt.
Either way you do it – saving up the cash all at once, upfront or doing it while paying down debt is totally fine as long as you take into consideration your job and lifestyle situation.
2 LAL // Apr 30, 2009 at 1:14 pm
Definite it depends. Seems like a lot of people want to know interest rates over paying off debt.
3 Meg from FruWiki // Apr 30, 2009 at 1:16 pm
I do applaud Suze Orman for adapting her advice to these changing times we live in. Too many people have relied on credit cards as their emergency fund and this recession has shown what a bad idea that is since credit may not always be available. Cash is king right now and Suze understands that. And she also wants her listeners to be prepared for the worst since so many are finding themselves in very bad situations and just about anyone could be next! Many have been caught off-guard!
However, I don’t think Suze meant for everyone to take her advice verbatim regardless of their situation. As with any pf advice, you have to use common sense and tailor it to your own situation. That’s why I get so upset when people turn into the zealous followers of this or that pf guru and insist that his or her way is the only way for everyone!
What you should do does depend on a lot of things: interest rates, your income, job security, how much you already have in savings, how much debt you have, ease of finding another job that can pay your bills, etc.
If you’re paying 20% on a debt you can knock out in a month and your job is reasonably secure, knock out the debt and then get to work on savings.
If you’re paying 10% on debt that is already going to take you a year to get out of and losing your income would send you straight into bankruptcy and/or foreclosure… stockpile enough to get you through however long you think it will take you to get a job (and maybe a little bit more, even).
Will credit card companies flag you as high risk? Maybe. But them cutting your credit matters a whole lot less when you have the cash. And, to be sure, credit card companies are cutting the credit even for those of us with stellar credit scores! But, to be safe, I think it’s alright to pay a little more than minimums just so long as you’re also stockpiling money.
And while 6-8 months expenses may seem like a lot — and may truly be a lot to many who are already struggling — it’s a lot easier if you focus on reducing your expenses like crazy! What would you cut if you lost your job tomorrow? Can you cut it now? You might be surprised! My husband and I have cut stuff like cable and haven’t missed a thing!
4 LAL // Apr 30, 2009 at 1:42 pm
I agree that reducing expenses now before the job loss would probably be the time. That way you can easier save a few months cushion. If we had a job loss i would be cutting expenses like crazy from food to cable.
5 Lynn // Apr 30, 2009 at 3:29 pm
I was actually shocked when I heard Suze say this and it seems to be the buzz in the pf world. I totally understand her reasoning and for some people it may be the right advice. Someone even called in her show that had about 5 months left to pay on his CC and he was asking her if he should really not pay it down until he had 8 months of savings. People need to use some common sense.
On the other hand I am saving instead of paying down debt – but I don’t have any credit card debt. I just recently got a rather large bonus and my husband and I were discussing paying off his truck early (we took out a 6 year loan…blah!) and then we would have $429 extra every month to really start paying down his student loan. But at this point I would much rather have the money in the bank than own a depreciating asset outright. I actually put the money in a bank that is hard to access and I will make a decision in 6 months what I will do with it.
6 JoeP // Apr 30, 2009 at 4:45 pm
I hope people learn from the hard times how to prepare in the good times. Always seems that good times call for spending Because You Can, but I think we’re going to see a lot of people adopting a low-debt lifestyle with cash savings/EF as things improve. Then maybe we’ll start seeing more consumption following net worth rather than net worth declining as a result of debt.
7 Rini // Apr 30, 2009 at 9:38 pm
Dave Ramsey says stay the course. Personally, I’ll put my money on him over Suze.
But then, I live in Texas and the “recession”… just doesn’t exist in my area. So perhaps I’m unqualified to speak on “these times”.
8 Abigail // May 1, 2009 at 2:03 am
I am a big fan of Liz’s. I have to agree with her on this one.
Most of us can’t afford to save up on EF very quickly. Meanwhile, the interest rates on your credit cards are making the whole thing moot.
That said, I think that personal finance is as much about psychology as math. So they need to figure out what they are comfortable with. Feeling secure is worth more than anything. If you are following sound advice and constantly full of anxiety, what’s teh point?
9 tom // May 1, 2009 at 8:37 am
Really at this point it is different for everyone depending mostly on the situation they are in such as living alone, at home or having a mortgage.
Add to that the level of debt and monthly expenses.
@FabouslyBroke
It will not take 6 years to save for 8 months of expenses. If someone really wanted to make it a priority to achieve that, they could do it in much less time.
Personally I save 50% of my income each month now.
10 Meg from FruWiki // May 1, 2009 at 9:49 am
Tom,
It might not take you, me, or perhaps most people 6 years, but I have known plenty of people for whom it would because there is just nothing left to cut and no time left in the week to get yet another job. Of course, that doesn’t mean that they need it any less. That’s just the cold facts of it.
11 Meg from FruWiki // May 1, 2009 at 9:38 pm
FYI, Suze Orman recently wrote a Suze Scoop on this topic: http://tinyurl.com/dbgl7j, which I think explains her position very well.
And I’m sure the timing isn’t entirely a coincidence, as I know she’s read this very post
12 fengshui // May 2, 2009 at 12:46 am
I’ve never understood some of the criteria for “high risk”. To me, high risk means not paying your bills on time. If I have $900 on a $1k cc and I don’t want to pay it off because I’d rather leave the $$ in my savings, that it my choice, but that doesn’t make me a high risk person. I don’t give a sh*t if I pay $5.50 in interest. Bifg freaking deal. I seriously don’t sweat over nickles and dimes for interest here and there. I think that it is more important to have $$ saved, which is what I’m doing. My debt is sitting there, and I’m not paying it down, I’m saving. But, then I’m “high risk”, even though I have savings and never miss a payment. Idiotic.
13 fengshui // May 2, 2009 at 12:54 am
I would LOVE to be able to save 50% of what I earn. That would be a dream. Unfortunately, I cannot, even though I make a great salary ($75k a year), but after I get my wages garnished with taxes, there just doesn’t seem like there is a lot left…. and I now have a house to pay for on my own, and NO, I’m not selling it. I’d lose my @ss on it during this time, and it is worth it to me to hold onto, as an investment. I’m spending 40% of my net pay on my house. It is worth it to me, for now anyway. I can sell my car and drive a clunker if I need to. I can cut back on other things. But no way could I pay my bills on 50% of what I make now. It sucks. It won’t always be this way.
14 LAL // May 4, 2009 at 12:41 pm
I think that it can take a long time to build an EF. It would take me a very long time as well. We have a lot of needs that need to be taken care of and we’ve been paying cash for a lot of things like repairs, etc.
I don’t think it’s an either or answer in all cases, it’s a case by case basis. For someone with $300k in student loans (yeah I know many couples with that type of debt!), perhaps it’s necessary to put off debt repayment until they have a 1 year EF. Consider they are getting out of professional school with DEBT like no tomorrow. Paying it off asap isn’t likely to happen.
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