Guru Suze Orman has gotten flak from Liz Pulliam Weston about her recent about-face on paying down credit card debt. From Ms. Orman:
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.
Ms. Orman was pretty clear about her conditions: “If you have an unpaid credit card balance and not much saved up in emergency savings …” (emphasis mine). She later makes it clear that if there is a sizable emergency fund, keep paying down the debt:
For those of you with a fully-funded emergency account please make it a priority to pay off any credit card balances as soon as possible. My new advice is solely for those of you who do not have an emergency savings account, or too small of an account.
Why pay only the minimum if you don't have a good emergency fund? She asks the key question:
If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down—what are you going to live on if you lose your job?
That's a great question to ask, and it's very sensible advice. An emergency fund buys time if the money stops flowing in. The less emergency fund you have if you lose your job, the less time before Very Bad Financial Things happen — trashing your credit score, losing your car, losing your electricity, losing your house. And I don't really care who you are: you can be laid off, or many of your customers could vanish because they were laid off. Your job is not a sure thing. (It could be close, but it's not a sure thing.)
Ms. Orman speaks to a fairly broad audience but it's primarily to those who are on the way out of financial trouble. I suspect that many members of her audience have jobs that are especially susceptible to economic downturn and probably are already scraping by. Fortifying the emergency fund with (likely) limited resources instead of paying down the debt faster will make it a longer battle, but the risk of being soundly defeated by job loss is greater now than it was two years ago. Lose a battle (or at least prolong it) in order to win the war.
So rock on with your bad self, Suze! 😉
Interesting points you make. For the first time, this past summer (2008) I took a look at a Suze Orman book, but just couldn’t get into it, perhaps because it seemed so simple. So I think you’re right, she’s meant for a certain audience. And if that’s right, then her advice is probably good. It’s unfortunate that she kind of dispenses it in a doctrinaire sort of tone, though. “I need you to listen up. My advice has changed.” etc. It’s better if people learn to think these things out for themselves. But I guess the second best thing is having a reminder like this.