Ginger makes some awesome points about Suze recommending an 8-month EF and just paying your debt minimums.
She even got some of my tweets in there! LOL…
Personally, I am with Trent (mentioned in Ginger’s blog post, as I don’t subscribe to his blog) on this one.
I think people should stick to what they were doing before, and just adjust as they see fit.
6 months as an EF is fine (more than fine), and paying as much as you can on your debt is still the way to go.
The thing that really makes me so bullheaded on this subject (as you can see in my tweets) are these three points:
1. I can see signs of the economy rebounding
Call me a bushy-tailed, bright-eyed optimist, but I just can’t explain it. I feel it.
There is good news out there, and it will take time (I am not going to even try and hazard how long it will take, but I guess 2010 – 2011 sounds about right). I am just not a pessimist (although paranoid), and I am optimistic that things WILL turn around sooner or later.
It is not forever that this will last, and things have been looking quite promising lately.
What I may be cynical about all of this, is that if the economy DOES turns around, will many people learn from these mistakes? Will the governments learn? Will the bankers and mortgage lenders learn?
I’m not so certain. When the economy is/was good, people forget/forgot the bad times (Great Depression for example). When the times are bad, people regret not having done something sooner. Human nature.
Like Ginger said, I don’t have a crystal ball, and I don’t claim to know any more than the next Jane Schmoe, but we can either be optimistic and take the signs of the market picking up as a good thing, or pooh-pooh everything and scream bloody murder when people try and tell us that things WILL turn around.
Perception can sometimes turn into reality.
And I know that the stock market is not a static entity that dutifully goes up or down based on P/E ratios, Betas, ROIs or whatever else you want to throw out there as statistics.
The stock market ebbs and flows with the change of people’s sentiments and hearts, and with unpredictable world events.
When unforeseen disasters horrors like 9/11 and Hurricane Katrina happened, what happened to the stock market?
And didn’t we rebound back from that once people started picking their shattered lives off the floor with the support of the nations behind them?
Think about it.
The States is not in this alone. There are plenty of nations out there hurting as well. And everyone was burned pretty badly in this, so globally, we all just need to gain confidence (investors like you and me), and as a collective whole, and things will slowly turn around.
2. If you save more than 4 months in an EF, you are losing money.
If you save 4 months in your emergency fund or savings, that is sufficient, in my opinion. I know that in a recession it takes 6 months to find a job in the same field you were in.
But I’ve noticed something curious.
I find that the more you save, the more lax you become about finding work (*raises hand*).
The less you save in a fund, the hungrier you are to take a job, any job, to make ends meet, and to just get rid of that debt (*raises hand from the person I was 2 years ago when I was in debt with only $1000 to my name*).
Survival of the fittest and all that.
Plus, if you keep more than 4 months in savings, you are only earning maybe 2% interest on that, while you’re being slammed with 19% interest on your credit cards?
You are losing 17% of interest on your high or low balances each year.
17% of $30,000 = $5100/year in interest alone, and that’s just pretending it compounds YEARLY.
It compounds monthly, sometimes daily.
And don’t forget that once you reach a certain amount ($50 or whatever it was here in Canada), you are officially taxed on that 2% interest you are making off your savings account, but yet you cannot claim any tax credits on the interest you pay on your credit cards.
3. It is not easy to save even 4 months of emergency funds
Most people can afford to put away $200/month. If they have a $2000/month lifestyle, that means it will take them 40 months or 3 years to save that money for 4 months.
I am not saying “Screw saving for emergencies then!”, I am just saying that realistically, people get discouraged.
Sorry, we’re humans. I got discouraged many times, trying to pay down my debt and trying to see the light at the end of the tunnel.
But I made it out, because I did what I thought was best for myself — $1000 in an EF and some crazy debt repayment.
She is now saying everyone should save for 8 months! That’s 6 years to save for that, at $200/month, assuming you don’t slip or have some sort of accident along the way that wipes it all out!
All the while, the $5100/year in interest is adding up to about $30,600 ($5100 x 6 years).
If I was told that I wouldn’t be able to start really paying down my debt until 6 years later, I’d be discouraged. Like REALLY depressed. 6 years is a long time to have that noose hanging around your neck waiting to choke you.
Maybe a compromise can be reached, take 25% of your debt repayment, and redirect it towards savings.
Mathematically, her advice doesn’t make sense to me. But emotionally, I can see how having a fatter, juicier Emergency Fund will make you feel more secure.
I personally don’t buy what Suze is selling, and you shouldn’t either without first figuring out what works FOR YOU, based on guidelines available from her.
If 4 months is good for you, because you can see opportunities where you can make money in a pinch, then go for it. If 8 months is more of your style because you are more of a nervous person, then go for it.
Figure out what’s right for your budget, your lifestyle, your income, based on your environment, age and skills. Then do what you feel is best. You can ask for advice, but don’t believe everything you hear.
All I am saying is just don’t listen to anyone (including me) blindly without evaluating the options for yourself.
Just a girl trying to find a balance between being a Shopaholic and a Saver.
I cleared $60,000 in 18 months earning $65,000 gross/year.
Now I am self-employed, and you can read more about 
