The Amateur Financier

Oh, Suze, Suze, Suze.  What are you doing?  If you keep changing your advice like this, it’s going to be hard to defend your recommendations.

If you haven’t heard yet (in which case, you probably are dangerously below your recommended dose of personal finance commentary), Suze Orman has started recommending that  you only pay the minimums on any outstanding credit card debt.  Previously, she had told her readers and viewers to pay down any high interest debt as their second financial priority (after funding a 401(k) up to your employer’s match).

Why the sudden change?  Well, Suze is noting that with banks and other creditors cutting down the credit available to credit card users, you could find that your credit cards are canceled or the available credit severely restricted when you pay off your debt.  In other words, it’s getting tougher to rely on credit being available should you want to use it.  (Whether this is a good turn of events for the nation in general is a topic for another day.)

I’m torn about how to approach debt repayment in light of our current situation.  On one hand, it used to a be a no-brainer that paying down your credit card debt would benefit you financially; you wouldn’t be charged interest on the debt and the credit would still be available if you had an emergency and no emergency fund.   However, now you might find that when you pay off your credit cards, they close down the card and deny you credit.  If this happens and you have a financial emergency, you could find yourself without an emergency fund OR available credit to tide you over.

On the other hand, the mathematically advantageous route is still paying off your credit card debt (preferably, starting with the highest interest rate debt).  Putting $1000 in an account yielding 3% rather than paying off $1000 in credit card debt at 30% will leave you owing more than an additional $270 one year from now.  Plus, as Liz Weston reminds us, paying only the minimums on your debts is the sort of thing that attracts the kind of wrong attention from lenders.  (The sort of attention that leads to said lenders getting nervous and cutting down your credit limits, exactly the situation you’re hoping to avoid.)

My suggestion: keep paying off your debt anyway.  Most debt repayment plans suggest putting aside at least a small rainy day fund (I recommended one month of expenses) anyway, so you are not working completely without a net.  If you are really worried about having a sizable emergency fund, consider splitting your additional money (the amount beyond the minimums for all the outstanding debts) between paying down your debt and adding to the emergency fund.  Put half the extra payment toward cutting down your outstanding debt, and the other half into your emergency fund.  You can cut the amount you put into your emergency fund as it gets higher and put more money towards debt repayment.

This techninique will slow down your debt repayment schedule, and lead you to spend more money in order to repay those debts.  However, we can’t forget the human element of the financial situation.  Hopefully, building up a sizable emergency fund makes you feel better about your situation and keeps you from shirking debt repayment altogether.  If this is the case, I’d say it’s reasonable, if not ideal, course of action for a non-ideal world.

• Great Debates: Debt Repayment vs. Emergency Funds
• Three Reasons to Have Money
• PF Spotlight: No Debt Plan

• Emergency Funds: A Quick And Easy Way To Start One
• Financial Guru Review: Suze Orman
• Ride out Financial Storms with an Emergency Fund