Suze Orman made a recommendation recently on the Oprah Winfrey Show that must have surprised some of her regular viewers: to make paying off credit card debt a lower priority. Usually if people know just one thing about Suze Orman, it is that she sees paying off credit card debt as the turning point in achieving personal financial success, so if she is saying to put less emphasis on credit card debt, it seems like a big change.
Yet Suze has been saying all along that it is important to have an emergency fund large enough to cover a few months of living expenses. Her change in strategy is a recognition of the increasing importance of the emergency fund.
- Your personal emergency fund should now cover at least 8 months of living expenses, Suze says, because if you lose your job this year, you could easily be unemployed for that length of time.
- You can no longer rely on credit cards or other bank lines of credit for your emergency funding, because if you lose your job or become ill or injured, that is when banks are most likely to cancel your credit.
- To collect your emergency fund faster, Suze suggests cutting your living expenses to half of your income, or half of what you used to spend. This also helps you get ready for an emergency. You don’t want to have to be figuring out how to cut your living expenses at the same time you’re looking for a job, for example, so cut back now.
For people who don’t have an emergency fund, this would mean paying the minimum amount due on credit cards until you save up an emergency fund. From my experience working for banks, I would suggest paying one dollar more than the minimum payment if you can. I am pretty sure that banks are making lists of customers who pay the minimum month after month, and targeting those customers with interest rate increases and credit limit reductions. Paying one dollar more might be enough to keep you off that list.
Once you have an emergency fund, please don’t keep it all in one place. This is especially important if you work for a bank: don’t keep much of your emergency fund in the bank where you work. You don’t want to risk losing your job and your emergency funds at the same time, even if there is only a tiny chance of that happening.
With the banking system looking a bit queasy these days, no one should rely on it in the absolute way you might have a year or two ago. Keep enough cash and food at home to get through at least three weeks. Many people do this anyway, but I know there are also people who keep no cash at all and rely on their cell phones to tell them where the nearest ATM is. That’s not a strategy you should rely on for the next three years. Pretend you’re in a science fiction movie and the ATMs stop working for a few weeks. What do you do?
Credit cards are becoming less important in this recession. Banks have already cut the total credit limits for credit cards by almost half, and they may keep cutting for several more years — and that’s not even counting the risk that bad credit card debts could drive a few banks out of business. As another writer put it recently, cash is king again — make sure you have some.