Pay off Credit Cards VS Build Emergency Fund Savings – Me VS Suze Orman

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Recently I had a bit of a “tweet off” with Suze Orman because of a slight breakdown in communication between Suze, my wife, and myself…

What Happened?

Now that we are a one car family at least temporarily — my wife takes me to & picks me up from work when…  a). I stay up too late blogging.  OR  b). I’m too lazy to ride my bike.  One or the other happens most days!

On our way home the other day she mentioned how she had been watching Suze Orman on Oprah (via our free over-the-air HD digital TV signal since I refuse to pay for television anymore) and was wondering if we were following the specific financial advice Suze was offering that day.  Despite being swayed by the advice Miss Orman was offering, Mrs. Jabs was not able to accurately relay the information to me exactly as she had heard it from the boob tube — probably more my fault than hers since I have been know to be a bad listener from time to time.

Here’s what my wife was trying to tell me, based on advice from Suze:

We should be focusing on building our Emergency Fund savings (and other savings for that matter) before paying off all our credit card debt because…

  1. If you have an emergency, you will have money saved to take care of your needs and will not have to go further into credit card debt.
  2. Many banks are closing your credit cards if you pay them off and discontinue use; so if you pay them all off & have no Emergency Fund built up, then you have NO way to pay for your emergency… not even with a card.

Here’s the way I was interpreting what she was telling me, based on advice from Suze:

We should be retaining at least part of our credit card debt so that the banks don’t shut off our cards.

As you can see there was a miscommunication from the time the information left Suze’s mouth, came through the tube, entered into my wife’s ears, proceeded to be processed through her brain, marinated awhile, passed on to my ears, was processed through what I like to call “my ingenious mind”, then was finally realized as I sat there in the passenger seat on the way home shaking my head in disagreement.

What Did I Do?

I did what any self-respecting personal finance blogger would do… I tweeted Suze Orman!  Here’s how it went down:

As you can see, we were able to resolve our differences… which I’m sure left Suze very relieved!

So What’s The Answer

As you know there is never one right answer for everybody in every situation, however… I’m going to take a crack at it!  Although I do not agree with Suze Orman on all her teaching points, we do agree on the subject of building your emergency fund; but I am going to throw in one additional piece of advice…

In most situations reaching a healthy balance is the name of the game, and the subject of Emergency Funds and Credit Card Debt Reduction is no different.  Based on this precept of proper balance, my wife & I have committed to focus our financial efforts on both.

We attack our credit card debt by focusing 75% of our available funds toward it.  We also strike a balance that works for us by putting 25% into Emergency Fund savings. This way we are simultaneously, and comfortably reducing our high interest debt and building our savings safety net.

What Do You Think?

What works for you?  Do you put all your eggs in either basket… or do you balance your eggs by spreading them out in different baskets so if you drop your one basket you’ll still have another basketful eat for breakfast?

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1 Bible Money Matters

Very cool twitter dialog you had with Suze Orman there!

I tend to come down in the camp that says that you should build a small emergency fund first, while paying the minimums on your debts. Once you’ve built up the small emergency fund ($1000-2000) you can hog wild on your debts until their paid off. At that point you should continue building your emergency fund until you have 6-8 months of expenses in savings.

When we were getting rid of debt we found that we never really had an emergency that cost more than 5-600 dollars. I don’t think that most people will. For that reason I think it’s ok to go with a smaller e-fund to start.

Either way it sounds like you guys have the right idea!

2 Paul @ FiscalGeek

I’ve wholeheartedly bought into the Dave Ramsey baby steps which is mini emergency fund of $1000 then pay debt. When debt is done fully fund the emergency fund. So far so good, but I have to say I’ll be fully relieved when that emergency fund is full. I’m so task oriented though I love to focus on one thing with everything I’ve got.

3 corrin

We are focusing on paying down our debt – any extra money (overtime, freelance work) goes into our emergency fund.

4 Matt Jabs

That’s another way of looking at it.. provides balance, but doesn’t touch your original budget money that you attribute to your debt reduction. Me likes!

5 Dustin @ Inzolo

+1 On the Dave Ramsey approach of $1000 mini emergency fund, then debt snowball, then 3-6 month ER fund. I think with the economy in the state it is in, most people think 6 months or more is the safest, but I’d be happy for 3 right now! I do have all my debt paid off though (except the mortgage).

I truly believe Suze Orman is paid off by FICO to say some of the things she does.

6 Green Panda

I think she brings up a valid reason for building up an emergency fund before attacking high interest debt. My only concern is, how long it would take a family to build up their funds while their high interest debt is climbing?

When I was in college, I set aside $500 for emergencies and then attacked my credit card debt.

7 CJ Perry

I agree with the Dave Ramsey approach about a mini EF before a fully funded EF. Although Suze Orman has slightly changed her stance to expand the emergency fund with the current economic crisis. I guess it depends on how safe you feel your job is.

8 Matt Jabs

@Pete(BMM), Paul, & Dustin: I like the idea of paying down debt at an increased rate, but I will maintain my stance that it is healthy to continue to build your EF with a small portion of your available funds (25% in my case). I do this for security purposes, but also to maintain my belief in the “always pay yourself first” mindset.

Pete is right that most people will not have an emergency, but I continue to pay myself because it just feels good, and is wise. We all know that when dealing with debt repayment & savings — there are both emotional and statistical elements.

9 Dustin @ Inzolo

Well, if it helps you win emotionally, that is the biggest victory.

10 Frugal Dad

I agree with you (and Suze, for once)…makes a lot of sense to build up a solid emergency fund before you get going on debt reduction.

As Suze refers to, many people used to simply say, “I’ll charge any emergencies on the credit card as they come along and then pay it off.” Well, with card companies pulling the rug out from under customers, it’s time to take matters into our own hands and stop relying on banks and card issuers to float our emergencies. Thanks for sharing this exchange!

11 Matt Jabs

I’m glad the mindset is shifting back toward personal responsibility and away from reliance on bank credit. I’m excited to see how deep, far, & wide that mindset travels over the next few years.

12 karyn

I don’t really understand building an EF first. Our only debt besides our mortgage is a smallish chunk on a home equity line of credit. I know that we’re paying 6% on it, while I don’t know (and I pray we don’t) if we’ll have an emergency. Wouldn’t it be better to work at eliminating that chunk before working on the EF? And if there is an emergency (God forbid), we do still have that line of credit. I’m not saying I want to use it. But things are so tight, we can only work on one at a time and are moving at a snail’s pace.

13 Matt Jabs

That is an excellent question Karyn. In your comment you said “God forbid” and “I pray we won’t”… That uncertainty is the purpose of having an Emergency Fund, and is the purpose of building it up before you attack your debt — no matter how small the amount.

There are a couple of existing strategies, most of which are mentioned either in the post or the comments above. A lot of people choose to build a small EF, as Dave Ramsey suggests (around $1,000-2,000), then attacking your debt until it is gone. Then once your debt is gone, return to building your EF to the point in which it will provide at least 3 months of full living expenses (some people do 3 months, some do 6, some to 8, & some do more). Do as much as you can, or as much as you believe God leads you to save.

Another strategy is to do what I am doing… build your EF and your savings simultaneously (I do 75% to debt & 25% to EF). You mentioned not having a ton to pay toward either… so I advise you not to think in terms of dollar amounts, but to think in terms of percentages! If you only have $100 available for both each month, save a percentage of it & use the remaining percentage for debt repayment.

Let us know what you think…

14 Dana

When I was married I amassed some credit card debt but was socking money away into a savings account in case we might need it later. When my husband found out, he was *livid.* He said it made no sense to save any money when we had a credit card to pay off. (Never mind he was adding to the balance with various stupid purchases.) He insisted that I withdraw it to go toward bills.

My stepmom, who had her name on the account (it had been mine since high school and I was funding it from my own paychecks, even), wisely did not let me have the full balance. Because not even a year later my husband got into serious legal trouble that involved me having to leave him because I was the one who turned him in. Had I never said anything to him about the account, I would have been in a lot better position to deal with the situation. And even if the marriage itself had never run into problems, let’s say his grandmother or mom died and we had to go to a funeral suddenly–we’d have had the money to go, and wouldn’t have had to pay interest on it.

You never think it will happen to you. But life doesn’t work that way.

15 Steve in W MA

@ Dana:

Wow, you’ve been through the wringer!

I’m glad you had that little extra money put aside and it was able to help you.

And I’m glad you’re OK!

16 Frugal Hero

I wouldn’t trust credit cards for emergencies. We had to put a new $6,000 roof on our Discover card. Two weeks later they doubled our interest rate for no apparent reason. Then Chase raised our minimum payment from $200/month to $500.

17 Matt Jabs

And yet another reason to ditch those darn credit cards altogether! Thanks for sharing.

18 velvet jones

As it goes with advice from anyone, “your mileage may vary.” No two situations are exactly alike. The Suze Orman’s and Dave Ramsey’s of the world give advice generic advice for the masses. It would make sense to educated yourself and make decisions based on your situation.

For mine a few years ago when I was in debt, it was saving for emergencies while paying down my debt.

I can see why Suze says to build up cash before paying off credit cards if you don’t have an EF already. Not just because the credit card companies are closing credit lines, jacking up rates, etc., however unemployment is high and edging ever higher. Not only that, from what I’ve seen with friends and read in articles, people are out of work for a long time, burning through their 3 to 6 mo. EF. I have a friend who has been out of work for almost a year, so I can see why Suze would say 8 months. At the same time, it would take most people a very long time to get to that place, so the appeal of just getting to $1,000 then paying off debt is more appealing.

Again, assess your situation because “YMMV.”

19 Matt Jabs

I cannot disagree with anything you just said. One of the most accurate comments I’ve read in awhile. Thanks.

20 Barbara Ling, Virtual Coach

Very cool tweetoff and most impressive indeed that such communications can happen in this day and age! Credit card debt just is not a good thing whatsoever.

21 jason

If you are completely sure that you will have your job over the next few months don’t worry about emergency fund. If you are not sure at all what will happen to your job, in that case just make minimum payments on your debt and all other money goes to emergency fund.
That is at least the way I think about it.

22 Debt Reduction

This is a difficult one. She’s right that you need an emergency fund (most people get into get because they have no money to deal with emergencies and have to borrow).

BUT, the interest people pay on debt is staggering. Compound interest really works against you when in debt.

As to what to do – it depends on your job situation. If either you or your wife are in a precarious situation with jobs, then the emergency fund is the priority. If you are in secure employment, pay about $100 a month into an emergency fund and put all the other surplus money into debt reduction.

23 Matt Jabs

Exactly right! There is no blanket solution… the best solution is always a situational but WISE solution.


24 Eden

Interesting discussion. I think it’s safe to say everyone agrees that you should have an emergency fund *and* work on paying off your credit cards. Emergency fund balances are going to vary for everyone though. $1,000 may be a lot for some people, but wouldn’t even cover a mortgage payment for many others. Pick a comfortable emergency fund balance and build to it while not ignoring debt and it should all work out in the end.

25 Kevin@OutOfYourRut

I lean in favor of the emergency fund as the foundation, debts later. The EM provides the financial and emotionaly stability needed to attack the debt problem, in that it relieves complete dependency on credit cards in an emergency.

The eight months that Suze Orman calls for is steep, but on the other hand, it might come in handy in the event you are in a position to pay off a credit card balance by negotiating a settlement that is less than the full balance. You can only do that if your vault is full. The large bank balance tends to stack the deck in your favor.

26 Jason @ One Money Design

Matt, this is a great post. You’re keeping it quite interesting with your discussion with Suze Orman. That’s pretty cool.

I’m in the camp of saving $1000 for emergencies before you go after that debt. Yep, not having some EF savings can increase your debt further if a financial storm does arise (and they always do).

Thanks again for this post.

27 Matt Jabs

Good Jason, I’m glad you are saving. I will still encourage people to continue to save at least a little, after they save their initial $1,000 EF, and while they are then paying off debt. As I mention in the post, and a wise implementation is to continue to put away a percentage into EF savings while you’re heavily hitting the debt. Even if it’s only 5% of your avaiable funds.

I put 25% toward EF & 75% toward debt repayment. It is important for me to continually pay myself while I pay off debt. It is also encouraging for me to see my savings grow simultaneously as my debt shrinks!

28 The Little Dough Girl

I agree with paying down the credit cards. The way I look at it is that if I get them paid off, I will no longer have the high monthly balance/payment and will not be paying interest on that as well. That means I can put more money toward an EF instead of throwing it away on interest. I see that it can build my EF faster though I may delay starting it.

The other comments have been helpful. I’ve set a goal to have the CCs down to a 10% balance or so my this time next year. Way too much debt over here!

29 Matt Jabs

I am SOOO glad to hear that you have set some goals!

Continue to follow after them & be passionate about the journey and you will get there sooner than you might first expect!

“A journey of a thousand miles begins with a single step!” Lao Tzu

30 Jason @ Redeeming Riches

I’m just impressed you had a “tweet off” with Suze Orman about debt! That’s like having a dance off with Justin Timberlake. Nice job. I have to agree with you Matt…I like the 25% to EF & 75% to Debt. You really do need that EF to keep from going under should something else arise.

31 CindyS

I don’t know if 8 months is the magic number or not but I think that SOME emergency fund is necessary. It would take me years to build up an emergency fund that large and quite a bit of the money that I was sending to CC could have helped. I used income tax refund to pay off the cards and now it all goes to my EF.

32 Matt Jabs

Cindy… I agree wholeheartedly! Even though our credit card debt carries a high interest rate, it is incredibly important to save some of our money WHILE we are in debt reduction mode.

Listen people!! Do both!!

I’ll say it again – I put 75% of my available money toward my high interest debt reduction and 25% toward my savings.

33 Dustin @ Inzolo

Matt, why don’t you tell us what you do? hehe j/k

Having listened to Dave Ramsey for a number of years I know what his argument would be to this point of trying to do both. There is great power in FOCUS. If you focus on one thing you are much more likely to get it done faster. Spreading yourself out and trying to do everything you *should* be doing is what gets people frustrated and overwhelmed. This is why he advocates that you stop paying in to your 401K to put it towards paying off your debt. It helps you focus and provides greater motivation to get it done faster so you can get back to your 401K and getting that free match your company may offer.

I think it is the idea of focus that makes his baby steps so appealing. You work on one thing at a time and get a sense of accomplishment when you can check another one off the list.

34 Matt Jabs

Did I mention what I do? 😉

Good points Dustin.

FOCUS is the name of the game. I focus on percentages, and I think this is a HUGE mindset change people can benefit from. Don’t think of things in terms of numbers… think in terms of percentages. Focus on those percentages and that is a single focus.

I did stop paying into my 401K and my IRA for now, until I get my high interest debt eliminated! I think it is unwise to pay into retirement accounts when you need the money NOW. And if you have high interest debt, then you DO need the money now. Getting rid of that debt is paramount to building savings.

That said… Emergency Fund/immediate cash savings is something I cannot stop contributing to while paying off debt. To STOP contributing to it altogether is unwise in my book.

So… I focus on percentages and put MOST of my funds toward the debt, but still reward myself w/a smaller percentage into my savings.

This concept has already saved me once in the last 6 months when a $1,000 EF just didn’t cover the $1,500 transmission I had to replace. Sometimes $1,000 just isn’t enough.

So what’s the answer?

Focus on percentages – put MOST toward high interest debt and the smaller part toward your liquid savings… the latter is your safety net.

35 threadbndr

While I like a lot of what both Dave and Suze say, their advice is (and due to media must be) generic. For example, I’m not that far from retirement, so I do not feel comfortable suspending my retirement deposits to focus on other financial goals – especially the one that gets me the match from my employer!

36 Matt Jabs

Good point…

Let’s all keep in perspective the fact that all these things should be done with prayerfulness – and should be tailored to each of our individual situations.

37 JoeTaxpayer

I suppose, like anything, it depends.
If you have many cards, and owe so much that building that emergency fund will take a long time, the EF may be costing you 24%+ and you may never catch up.
I had a cash EF that was a good 9mo of expenses and decided to throw nearly all of it. That let me pay the mortgage down enough that combined with the lower rate, moved us from the 27yrs left on a 30 yr mort, to a new 20yr, at a lower payment.
Not for everyone, I know. Each person needs to lay out all their details and decide what’s right for them. Suze is trying to hit her audience, and I suspect her advice does just that.

38 Leah

Goodness, what a concept. We follow the Dave Ramsey protocol on EF building. Which is first and foremost saving up $1000 before devoting extra money to debt.
We paid off our CC’s at the beginning of this year with Income Tax Return, so all we have now is Car Loan, Mortgage and those dreaded student loans.
Anyway, Dave says to save up this $1000, because most emergencies cost you less that that and it is easily built up again should you need it for a true emergency (ie: new refrigerator, car repair, etc.)
So, the goal is to get to only having a mortgage to pay off. When you only have the mortgage left, then build up the EF to a 3 to 6 month savings. Once you have that EF built up, attack the mortgage with “Gazelle Intensity” as Dave is so fond of saying.

I’m sure you know all this, Matt. For the good of the readers. 😉

39 Matt Jabs

Thanks Leah… great info!

Yeah, we are familiar w/Dave’s awesome teaching points. He truly is an inspiration, and I thank God for him. Like Dave says, “personal finance is personal and you can’t go wrong getting out of debt”! We employ (and invented 🙂 ) this 75/25 approach because of several successive instances that drained our puny $1,000 EF and left us using a credit card again. You can go through the archives of my Monthly Debt Reduction and Savings Statements or my detailed post on our Balanced 75/25 Method for details – but suffice to say… we found we felt much more comfortable with more than $1,000… so we just continually save 25% of it.

40 Torrey

Following the Dave Ramsey plan would have screwed me a couple of weeks ago. I had an emergency over $2500. That’s why I feel better having more than $1000 in my EF and lean more with Suze’s advice.

41 Jeff

Deciding to payoff or pay high interest is a double edged sword. For people with interest rates in the single digits and low teens, building up a reserve is a good idea. But anyone who has a 20% plus interest rate is wasting $200 a year on every thousand dollars of debt they carry. That’s a grand for someone with 10k.

Basically, you might get hurt by a credit limit cut if you pay your card down, but you’ll end up with a lot less in the bank if you continue to pay absurd interest rates on your credit card debt.

42 Inge

My husband and I have been working a modified version of the Dave Ramsey Plan. We built our $1,000 emergency fund, will have paid off the Credit Cards on Friday (7/16/10) (while continuing to invest in 401k and Roth – we are not getting any younger) and are now faced with what to do on our remaining debt (car, 2nd mortgage).
The 2nd mortgage is by far the largest balance and highest interest rate. Our first approach was pay 55% or ~$600 of the snowball previously paid to credit cards towards the 2nd mortgage and pay 45% or $500 towards the EF. We just changed our minds and here is how. We decided that we are going to put all money towards the EF BUT will account for the $600 payments in a separate ledger (Read a spreadsheet so I don’t forget how much I saved). When we have enough money in the ledger to pay the 2nd mortgage in full (April 2013) (or refy both 2nd and 1st at a lower rate – we currently don’t have enough equity due to the market) we will pay the 2nd mortgage off. We know that this will delay our loan payoff by about 2 months. However, we also know that having this money in the bank will allow us to pay all our debt in case of an emergency (e.g. one of us looses their job) whereas if we cannot pay the 2nd mortgage for a month or two because of dire circumstances we might loose our house. (once the 2nd mortgage is gone we can afford the remainder on just one income). We consider the interest loss here an insurance payment we make (about $50 / mth per my calculations). Anyway, what do you think?

43 Damon Day

Hey Matt,
That is way cool that you were able to converse with Suze via twitter. The amazing part is that you resolved your differences using only 140 characters. Ha ha.

While I do agree for the most part with Suze, as you state, every situation is different. For many, waiting to build up an 8 month emergency fund before paying off credit cards will be a monumental task. For instance if you need 5000 per month to live on, and you can only devote 500 a month to an emergency fund then it will take you 80 months to build an 8 month emergency fund.

So one must take many factors into account to decide what is an appropriate level for their EF and when they should start attacking their CC debt. For most people, paying the minimum payments for 80 months is not going to be a very good strategy.

44 Matt Jabs

Yeah, Suze was lucky that day. 🙂

Most people in hardship never consider getting rid of possessions as a way to trim/save… it needs to be put on the table right away. “You get what you pay for” takes on a whole new meaning when you get more than you can afford!

45 Angelique

The Army has given us the opportunity to pay off one car and purchase a home. though we had orders to stay here for another 3 years while I finish college (no loans…using financial aide & hubby’s GI Bill), they are moving us 3 years early. The 1000 we had in the ER fund has been used on…emergencies…bam one right after the other! and now we MUST fully fund the ER accoount before moving and renting out our home. For us that means paying minimum on all other debt. we refinanced the car at a lower rate and MUCH lower payment (we had 5K equity in it so now we pay 225 less). We must have 6 house payments in the bank just in case renters don’t pay or the house is empty for a month.

I think that the ER fund versus debt issue is one that solely depends on a person’s situation. If we were merely renters or living in base housing, 1000 would be sufficient while paying off all debt. But we cant sell the house, and it’s where we want to retire in 9 years.

46 DH

Personal circumstances must be considered. I am a single parent and need to be sure my son and I are protected in the event of a job loss. That means having a fully funded EF of 6-12 months of expenses would give me peace of mind over the credit card debt I current have but am not paying off as quickly while I am funding the EF.

47 ren

heres a little something i do that helps give me a mental boost when battling debt…i pay the minimum due for the month and also pay enough in addition so the balance is to the next lower hundred…example is balance is $765, and minimum due is $50, i pay atleast $70 to get the debt under $700. its just a little game, but i paid off my car a few months early and now using that money to reduce other debt.

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