In light of how badly millions of Americans were burned in last year’s financial meltdown, there’s an eager audience for personal financial guidance. But consumers should take pains to ignore one particular piece of advice that’s been making the rounds of late.
I first heard about it in an October email from a Consumers Digest reporter who was writing a piece about financial planner Robert Pagliarini’s new book, “Plan Z: How to Survive the 2009 Financial Crisis.” Pagliarini urges his readers to employ the following strategy: Pay only the minimum payment on your credit cards, and deposit the difference into a savings account that can help you cover expenses in case of financial emergency.
Almost exactly the same advice was offered today by Nancy Langdon Jones, a “certified financial planner” from Claremont, California. Quoted in an article on RealSimple.com, Ms. Langdon Jones told consumers that “if you don’t already have an emergency fund, pay just the minimum on your credit-card bills and start one now.”
Having an emergency fund is a good thing. But creating one by carrying additional credit-card debt is a staggeringly dumb idea.
If you’re lucky, a $1000 deposit in your savings account might earn you an additional $15 in interest this year. But you’ll carry unpaid credit-card balances at 19 percent interest or more. So creating a $1000 emergency fund by not paying off credit-card debt ends up costing you $175 a year or more.
The best investment opportunity most families have, by far, is paying off credit-card debt. A family that chooses that option not only ends up well ahead financially, it also enjoys greater security against unexpected hard times. After all, if it reduces its credit-card balance by $1000, it not only saves a lot on interest payments, it can also borrow an extra $1000 on that card if it needs to.
Mr. Pagliriani admits that his proposed emergency fund strategy is a crazy solution for crazy times, but says it all boils down to this: Which would you rather have, no debt, or cash to pay for food, shelter and other essentials? “No debt” is the uniquely correct answer to this question.