I listen to Dave Ramsey and Suze Orman, but I don't necessarily agree with everything they say.
Dave Ramsey recommends creating a $1000 baby emergency fund, and then paying off debts smallest to largest (based on amount owed). Suze Orman recommends paying off debts in the order of highest interest rate, regardless of principal balance. She used to say to focus on paying down debts aggressively, then to save up an emergency fund after the debts are paid off - but she has changed her advice and now recommends only paying the minimum on credit cards and saving the rest for emergencies (until you have 8 months worth of living expenses saved up).
Intellectually, I have a really hard time with Dave Ramsey's advice. If I have one credit card with a 20% interest rate, and another with a fixed 6% interest rate, I'm going to pay a lot more in interest by paying off the 6% card first. I know that he says you'll pay it off quickly enough that it won't matter, but the reality is that it does add up - especially if the balance owed is very high, to the point that it would take a year or two (or more!) to pay it in full. I get his point, that it's a psychological feel-good thing, but I can't bring myself to follow his advice. The other problem is that $1000 for an emergency fund doesn't get very far - we've had a few major home repairs that have cost far more than that, and were things that were truly urgent and necessary (heat & plumbing).
But I don't like Suze's advice either. Eight months of living expenses is a LOT of money, even for someone sitting in a very secure financial situation. With absolutely no consumer debt, and a paid-off mortgage, that would still take at least a few months to save up that much money. And for someone who owes a lot of money, it would take a couple of years (or more!) to save that much up, meanwhile you'd be paying a ton in interest.
I'll admit that the credit crunch and recession has made me a little gun-shy, and I did shift my focus from aggressive debt payoff to a blend of debt payoff & saving. I had been paying off about $1000/mo on one of the credit cards, and practically nothing into an emergency fund, but when the credit companies started slashing credit limits and chasing balances, I decided to put $500/mo towards the card and another $500/mo in a savings account.
I've got $5000 saved in my emergency fund, enough to make me feel comfortable. I just don't know whether I should continue my 50/50 strategy, or if I should hold the emergency fund at $5000 and refocus on paying down the credit card debts.
Any advice?
3 days ago
Depends on how safe your job is, or how long it would take to find a new one.
ReplyDeleteIf your job is secure, I'd say 5K is plenty.