Okay, obviously many of you readers have voiced your agreement with my opinions from time to time. And other times have even politely disagreed in ways that were thought-provoking and created an interesting dialogue.
But every so often it’s just awesome to have a renowned personal finance writer write about many of the same ideas you’ve had/written about.
Enter Liz Pulliam Weston, aka the Web’s #1 personal finance writer. She was once a coworker of my mom’s up at the Anchorage Daily News, before she went back to school and became a PF writer.
Liz makes some statements in her latest piece The 0-Dollar Emergency Fund that pretty much coincide with some points I’ve made in previous posts.
She discusses the opportunity cost of saving for an emergency fund while you have credit card debt.
It makes no financial sense, for example, to have money sitting in a savings account earning 2% or 3% for years while you have credit card debt accumulating at double-digit rates. Paying down your credit cards not only lowers your interest costs, it also frees up space on your credit lines that you could use again in an emergency.
Of course, I didn’t have my arguments as prepared as Liz does. In the first article, I wrote about why it made no sense for Tim and I to save an EF while our credit card debt accrued so much interest. We, however, were speaking from a strangely secure position of financial difficulty. After all, Tim has no job to lose, and unemployment has been extended for the foreseeable future. I have disability payments and contract work that is pretty much assured through September, unless my performance utterly tanks.
Many of you wrote in asking how I proposed other people could pay bills. Truthfully, I hadn’t thought the position through past my own situation. I was simply pointing out that there are times when traditional priorities such as an EF are actually detrimental to debt reduction.
Looking at the situation mathematically, it makes more sense to pay down credit card debt now. Then, if emergencies occur, you put them on the card. In the meantime, your balance is lower, thereby accruing less interest — especially important given the popularity of the double-billing cycle.
But several of you wrote in to remind me that — duh — you have things like mortgages that can’t go on a card (usually). So what to do? Well, Liz suggests a home equity line of credit. I’ll wait for you to finish cringing.
We are all anti-debt. I know. The knee-jerk response is why anyone would want to take out a HELOC. Liz points out that the maintenance costs on such things are very low. The trick is to only use it if necessary, such as in an extended period of unemployment. This and credit cards will help many people stay afloat long after the traditional EF has run dry. Especially as unemployment averages stretch beyond all previous imaginings.
I have only one real fault with this idea: availability. Liz doesn’t cover what to do if you’re turned down for a HELOC. My guess would be to keep building your credit score up and re-apply. It’s something you hope you’ll never have to use anyway, so the only real goal is to apply before you need it. Still, credit is still tight, and we’re waiting to see if the government’s plans will actually get banks to loosen their stranglehold on lending funds.
To be clear, Liz doesn’t seem to be saying you should ignore the EF altogether. She’s simply reminding us that saving up for an EF may hinder your debt-reduction efforts. In addition, emergency funds may not keep you as safe as you had hoped. When you sit down and crunch the numbers, it makes more sense to throw the money at debt than into a bank.
I’m guessing a lot of people will try to repudiate this advice. Liz is finding cracks in a PF ivory tower. People love their emergency funds because it’s soothing to have money in abeyance. It makes them feel less vulnerable, especially in such turbulent times. What’s more, it’s pretty hard on the ego to go further into debt. When you’ve worked so hard, for so long, to lower credit card balances, it’s disheartening (to say the least!) to charge them up higher.
What do you think? (And feel free to agree with me — apparently all the cool PF kids are doing it!)