Suze Orman caused quite a stir back in March when she recommended that people start paying just the minimum amount on their credit cards. In lieu of paying more than the minimum, she said that people need to build up an emergency fund that covers eight months of living costs. In this environment, she argues, that's more important than paying more than the minimum amount on credit cards. In response to Orman's March column, Liz Pulliam Weston, a highly respected personal-finance columnist, wrote a column last week titled "Bad advice from Suze Orman." Now, in what I can only imagine is a response to Weston's column, Orman is out with yet another column -- explaining, in detail, why her March column still makes sense.
From Orman's column, which was published this evening:My strategy for years has been that if you are in credit card debt you are to pay the minimum due each month on every card, and then pay extra on the card with the highest interest rate. So all that has changed is that I am now telling you to not pay more than the minimum on the card with the highest balance. To be honest, in this environment if you were paying only the minimum on all the other cards, you have probably already seen your credit, or your credit score impacted. Paying only the minimum isn’t “good enough” according to the credit card companies right now.
So why am I not telling you to pay more than the minimum on all your cards to preserve your credit score? Well, I seriously doubt you have the money to pay more than the minimum on all your cards; if you did you would have already paid down your debt instead of paying the astronomical interest rates the card companies are levying these days. And even if you could manage to pay down your card debts, we still have the problem of where you will come up with cash in an emergency. A lowered credit score you can recover from, but not being able to handle a financial emergency can lead to horrible consequences. I wish you weren’t in this situation of having to choose the lesser evil, but here you are. I say sacrifice your credit score if necessary, so you can protect yourself and your loved ones from life’s what ifs.
First, I have not followed Orman over the years, so I have no idea if she has always recommended that you pay minimums on all of your cards -- and pay more than the minimum on the card with the highest interest rate. I take her at her word that she has said that (even though she did not spell that out in her March column).
Second, Orman says that she's not recommending that people pay more than the minimum on their cards because she "seriously doubt[s] you have the money to pay more than the minimum on all your cards; if you did you would have already paid down your debt instead of paying the astronomical interest rates the card companies are levying these days."
My question: if she "seriously doubts" that people have the money to pay more than the minimum on their cards, how does she propose that people build up an eight-month cash reserve fund?
Orman writes: So how do you pull this off? I am not going to tell you to cut back your spending. Please. I am not going to insult you; I know you have already done that. I know you have scoured every expense to cut out all the “wants.” And I know you are not making matters worse by running up more credit card debt. I get that you “get it.” But you still need a way to start building up real emergency savings. That is why I suggest paying less on your highest-rate credit card (but make sure you pay the minimum due) so you have more cash to put into a savings account.
I'm not trying to bust Orman's chops. I'm not. But for the life of me I do not understand how someone will be able to save eight months' worth of cash for emergency purposes -- especially if they've already "cut back" on spending and "scoured every expense to cut out all the wants."
All that Orman is recommending here is that people not pay more than the minimum on their highest-rate card. Assuming that people were already paying just the minimum on their cards (per Orman's advice) and assuming that they've already cut their expenses to the bone, and assuming that Orman is correct that people can't pay more than the minimum on their cards anyhow, how long will it take to accumulate eight months of cash that will be socked away in an emergency fund?
Suze does not address that in her latest column, but I'd imagine that it will take years. And maybe a lot of them.
Read Orman's column here.
Friday, May 1, 2009
Suze Orman Says That Emergency Planning Remains Job #1
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35 comments:
While much in Orman's column doesn't potentially make mathematical sense, there is one thing that really resonates with me. Credit score, as well as perfect payment and paying on time really do not matter anymore when it come to credit cards at least with Citi, Chase, and particularly B.O.A. all of whom I got dinged with huge increases on, despite never ever paying late or missing payment with. I only have a balance with B.O.A. now, but they all explained my prior credit history did not matter one bit. So what is the point of protecting your credit score if you are not applying for a card or new credit lines??? Under these new lender practices, apparently nothing.
Yep. And you'll notice that I did not mention the score aspect of her column either. I think that Suze genuinely cares about her readers. I follow her on Twitter and she is very good about helping people. But I'm really trying to understand the math here. My math skills suck! Maybe I'm just not getting it.
I don't know why you're so confused, and frankly I'm kind of tired of people harping on Suze's March advice. I'm beginning to wonder if her name just draws more traffic.
First: I've said it before and I'll say it again, Suze's advice was just fine for the people to whom it was addressed. Those being people who are working on paying down credit card balances but who have not yet attempted building an emergency fund. Even Weston's article concedes this is true, after she jumps through hoops to pretend the advice applied to everyone. Which was very disingenuous if you ask me, and was probably just a whorish attempt to drive traffic to her site.
Second: No one's saying 8 months of expenses in an emergency fund is something you can do in a month or so. That's silly. Dismissing it as impossible only allows people to NOT start an emergency fund. The fully funded emergency fund is a long term goal and no one ever said differently.
Final word: IF you've been trying to pay down debt, by either paying minimums on all cards except the one with the highest interest or some other method, AND you have no emergency fund, THEN the money above the minimums that you're throwing toward debt should be going into an emergency fund. 8 months is the final goal for that fund, it will take a while and that's OK. But in the mean time every single dollar in an emergency fund is that much more security that you have if the worst happens. IF you are NOT in that situation, then click elsewhere.
And don't beat up on her for not offering up the same frugality tips everyone's been repeating for the past 8 months. Those who aren't working on it who should are already aware of that. She's not saying spend stupidly, she's saying that if you're not stupid then you should have already stopped that. It's a way of telling people what they should be doing while not accusing them of stupidity. It's not a mystery.
Push me, why don't you, CM? LOL!
That picture of her will haunt me forever!!!!!
well said caughtshort! I listen to what she says, but i always find a "but" or ans "or" or an "only if" in her reasoning, which makes me think i know almost as much as her, but am better looking!!
CS, I am not confused about the advice. Pretty straight forward. What I am confused about is how practical the advice is. If it's going to take years to get the emergency fund, I think it's better to just go ahead and pay down the debt. That's what I am thinking.
As for how well Suze Orman plays (for traffic purposes), I couldn't tell you. I have more than 600 blog entries here at CreditMattersBlog.com. I've mentioned Orman five times. Of those five times, twice I mentioned something that promoted one of her products. Therefore, I have written three blog entries that are like the one tonight. Not enough data for me to know if there is a traffic bump from it. I doubt there is.
Of course, I blogged about Orman tonight because I figured that people would be interested in it. As long as my core reader is interested, that's good enough for me. I don't think I'll draw outside traffic to the site because I've mentioned her. But you never know.
You seem to know Orman better than I do, so I will defer to the rest of your comment. As I mentioned earlier, I have not followed Orman that closely over the years.
CS, Liz has her hands full with Suze supporters over at MSN. Not sure she bargained for that.
Anyone that PIF's every month would be confused by this advice.
20K in the bank and 20K in CC debit is better than zero in the bank and 20K in availble.
We can not count on credit lines being an sudo emergency fund.
I really don't have 8 months of cash in the bank-
Do I have access to a years worth of my salary without creating more debt? Yes. and they can be liquid in a few days.
If I had to pull 30K out of an IRA - (10% penalty and add to AGI) that would be equal to a 25% APR.
Has anyone ever applied for credit when the really "needed" it? If you NEED it they ain't gonna give it to you.
I an starting to ramble- /comment
I am not a Suzi fan, but the people that needed to hear her message should take her advice.
I kind of like Suze myself. Don't shoot me. And I do agree with her, too. It makes a lot of sense to build a cash reserve. My problem is that the people who need her advice the most are those who can't afford to build a reserve. They're tapped out. They're already making minimum payments and they're barely making ends meet.
Frankly, her target audience seems to be in a pickle. Either way it seems like a losing situation. Not enough left over to build an emergency fund and not enough left over to chip away at credit-card balances in a meaningful way.
Most of the posts here look at things from a financially savy point of view. I don't really follow Suze either, but I don't think you are her target audience. Here is my take on Suze's comments:
I think that she is saying that you need to get your house in order. If you carry a balance, but are paying $100.00 extra - you should now put that money away in case you need it for necessities in the future. In a year that will be $1200.00. It isn't alot of money, but it is more than you may have now. If things get really bad you can use it for food or shelter to keep your family alive which is much more important than owing $1200.00 less to a bank and starving to death.
Maybe I read things wrong, but I didn't get that she was talking to people who had already reduced their payments to the minimum due. I got that she was addressing people who had no (or little EF), had already reduced their expenses but were still paying more than minimum.
If that is the case then I think what she is doing is preparing people for default. I don't think she is advocating default, just if disaster strikes this is a way to have some of the credit cards money in your possession. You can't really do that after default.
Mathematically, this advice makes no sense. But the math assumes you have a continued source of income.
Clutch, this comes directly from her column:
"My strategy for years has been that if you are in credit card debt you are to pay the minimum due each month on every card, and then pay extra on the card with the highest interest rate."
Thus, she says that her advice has been to pay the minimum on every card -- except the one that has the highest interest rate. That card is where you should -- and she says she has recommended -- that you pay more than the minimum.
Now, her advice is to take the excess payment that you would have sent to the high-rate card and divert it to your emergency fund.
My point is that if you're that strapped that you're making a minimum payment on each card you have -- you likely don't have a lot left over for the highest rate card. But maybe these people do. Maybe I am underestimating them. And if I am, I apologize.
Anon, right above Clutch, I agree with you. I think that's exactly what she is saying. Take that payment and apply it to the emergency fund instead.
My ONLY quibble with the advice is that I assume that these people don't have much to send to the emergency fund in the first place. It sounds as though these folks have already cut expenses, and stopped spending on "wants." There just isn't much left over. And if there isn't much left over, I think that you may as well just keep knocking down the high-interest debt.
Of course, you may be perfectly correct. She may be, in fact, preparing these people for default. And having looked at her advice with a fresh set of eyes this morning, I think I agree with you. She looks to be doing just that.
CM, right, I get that. But I think she is just modifying her earlier advise of reducing payments of all but your highest interest rate card to the minimum due to reducing your payments to ALL of your cards. She is making her plan even more aggressive.
In a way she is telling people to do what the banks are doing; forgo future profit in favor of money in hand NOW. To me this sounds like drastic disaster preparation.
Or, screw them before they can screw you (if you default).
Clutch, that's exactly what she's doing. Previously, she said to pay minimums on all cards -- EXCEPT the highest-rate card.
Now she is saying to pay the minimum on ALL cards. That's where the advice changed (according to her column).
My quibble stems from her other comments in the column. She made it seem as though all of these people were strapped. That's why they couldn't afford to pay more than the minimum anyhow. I just figured that, if they're already strapped, they likely weren't diverting much extra money to the highest-rate card. And if that's true, then it could take a long, long time to accumulate an emergency fund. And I mean a very long time.
So, while you are building that fund, and paying minimums during the entire time, you'll never chip away at the credit card balances.
Which makes me think that our earlier poster was correct. Sounds as though she's preparing them for default.
Yes. That's the underlying ominous tone I get from this piece.
Thanks for helping me out, guys. I couldn't imagine being in that predicament so I couldn't get my arms around the advice. But if you assume that these people -- a lot of them -- are going to default anyhow, Suze's advice makes sense.
The exploding unemployment map from an earlier story of yours comes to mind.
And all of those conference call transcripts I read, too. All of the card issuers expect higher unemployment until the end of the year -- at least. With unemployment comes higher charge-off rates.
I am doing, and will continue doing the opposite of the Suzi advice. I had to (in part) live on credit cards for a year and a half. Almost 16k in cc debt plus what's left of the mortgage and student loan. The interest on just the cards a couple of months ago was over $180.
I'm paying min+ on all cards and working on the highest interest ones. This last week I paid off the two highest ones. By next summer I will have the cards paid off probably the mortgate. Then I'll start working on the emergency savings (and the last loan).
Right now I'm piling on perhaps $350 per month (x12 is over 4,000) extra debt in interest. This is not sustainable. I can't afford to be unemployed and I'm too old to trash my credit. Not enough years left to recover.
Freedom from debt: Priceless!
I think you're working way too hard at reading between the lines. Orman is just saying that short-term liquidity could be more important, right now, than the long-term bottom line. Yes that would make sense as preparation for default, but it also would make sense as preparation for a short period of unemployment, or other short-term crisis.
Imagine a person who has substantial CC debt, and perfect payment history, and no emergency fund. Imagine that he now has an extra $600 per month, because of a recent promotion and/or recently adopted austerity measures. What should he do with the $600?
A year ago I might have said: "Pay down the highest interest card, and be sure to keep your perfect payment history on the other cards. Don't worry about an emergency fund, yet, because every time you pay down the balance you'll be increasing the available balance, which you can take as a cash advance if an emergency happens."
I could have said that a year ago, because, back then, it was unheard-of that a bank would slash your credit limit when your payment history is perfect. But now there are some banks that will cut your credit limit, like clockwork, every time you pay down the balance. So each big payment actually reduces your liquidity, and therefore increases the danger of damaging your perfect payment history if a crisis comes up.
P.S. On the radio a couple of weeks ago, I heard Clark Howard almost say the same thing Suze Orman said. He ended up advising his client to make the big payment, but only because she said her CC debt was with a credit union. He said he would have advised her not to make the payment, if her debt had been with one of the major CC issuers.
CDP, I might be reading too much between the lines. (I do that too much!) But I do see that my readers have some good comments about this subject, so my post was not a waste.
Thanks for all of the comments (everyone).
Hi CM...I didn't read all the comments but I read most of them.
What I gathered from SUZE, as I've also read her past advice is this is really for people on the snowball method. In which you're working on paying off your cards by paying the minimums on all cards except the one with the highest interest, on that card you're paying as much extra as you can on, when that card is paid off you apply that money to the next card.
Now, she's saying not to pay the extra on that card but put it in an EF.
Snowball method does not mean that you're so strapped that you're in potential default. I'm on the snowball method now and I pay an extra $300 on the highest int. card, once that card is paid off, on to the next.
Her advice in the past was pay your cards, keep your credit clean and use your credit as an emergency.
But with the way the banking industry has changed, they're closing cards even for those who have are paying or increasing their interest. Times has changed and accordingly so has her advice. I think she's dead on.
Shop_Free
Shop Free, I appreciate the comment. As you can tell, I'm a bit out of touch with Suze. Haven't followed her words over the years. But I do appreciate my readers who do know her philosophy.
Thanks.
CM, can't really say I follow Orman, but ever since I watched one of her shows on PBS, especially after the Q&A session at the end, I kind of understood who her audience are. As diversified as your readers here may be, I doubt many would fall into her category, so it's not too surprising you and a lot readers here are confused by her advice. Given I am not in that boat either (strict PIF ever), I can't pretend I appreciate the situation completely, but it might make sense for certain people, and it's not easy to think as if you are in someone else's shoes, is it?
Anon, no doubt. I was not in that frame of mind when I wrote my blog entry. But now that I have heard from a people -- both here and in my email -- I understand where she's coming from.
I figured that most people wouldn't have much left over each month so it would take forever to build up an EF. If you're throwing quite a bit at the highest-rate card, then the EF will probably get built. If you're barely putting any money toward the highest-rate card, it's going to be an uphill battle.
Saving money is a mindset. And while Suze is not my favorite financial advisor, she makes a point. Everyone has to start somewhere. My advice to clients has always been to add their name to the monthly list of required bills to pay. It does not matter if its $10 or $50, it puts one in the habit of saving for a rainy day. I'm old.... and I remember the Christmas Club books where you went into the bank every week and put in $2 so that at the end of the year you'd have $50 to spend on gifts for Christmas. The theory is the same. The people who vigilantly practice any form of systematic savings will eventually come to appreciate the benefits and their mind-set will move from spending to savings over a period of time.
I think I know what my problem is. I cringe at the thought of paying so much interest each month (if I am just paying the minimum).
But you do have to get an emergency fund at some point.
It's rather simple actually. If you're snowballing (which is what she was originally advising), cut the size of your original snowball down and instead put that money in a savings account.
If you have 6 cards with balances. You pay the minimums on all but one card and $500 over minimum on the highest interest card, pay the minimum instead and take $450 and put it into a savings account instead.
Where I disagree with Suze is I think you should go half way. Take half of whatever over the minimum you were paying and put it in the savings account. Continue to use the other half to snowball your way out of debt.
Drewbert, I like your plan. That way you are still chipping away at the balance of the highest-rate card.
I've documented much of the inappropriate and erroneous advice she has dispensed over the years...
http://www.erictyson.com/articles/20090127
I also researched her background and the more you know, the more you'll question her advice.
Her background is not relevant, her advice can be evaluated on its merit.
Also, the main problem with her advice is she oversimplifies a number of things. That's why you have to judge her in relation to her audience.
Frank over at Bad Money Advice is out with a story on Suze's recent column.
Suze’s Surprising Credit Card Controversy
http://badmoneyadvice.com/2009/05/suzes-surprising-credit-card-controversy.html
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