Well, we’re going to have to agree to disagree here. I think it’s foolish to put money away for a rainy day while in the middle of a monsoon.
Depends on the storm. If it’s a mild rain get indoors, find your umbrella, and patch leaks. If it’s a hurricane crossed with a flood obtain a boat by any means to stay afloat.
My personal opinion is that far too many folks wait too long to cut back on costs when hit with a job loss. It’s hard and it hurts, but when I was laid off we went immediately to an austere budget. We gave a up a lot, but we don’t have debt (and I hope we won’t).
Regardless of how she got in the hole, the question is now how to get out. If her credit is still good that’s to her advantage, but she probably needs some sort of professional help to get this problem sorted out in a manner that won’t hurt her further.
I’d rather see her stick to a budget she CAN stick to, even if it takes her ten years to pay everything off, than to attempt a level of budget-cutting that won’t last her six months to try to get the debt gone in two years, or three, or some other arbitrary number.
I appreciate your opinion, but let me put it this way…you want someone deep in credit card debt to use a credit card when an emergency arises, simply because every spare bit of cash must go to the debt?
Emergencies will arise. The car breaks down, someone has to go to the hospital, the front window gets broken by a badly aimed baseball. Having the cash to take care of things means the credit card debt does not increase but the problem gets taken care of.
While this is true, having a trivial emergency fund is not going to make a material impact on the size of the overall debt. Its psychological impact may very well outweigh the relatively small financial one.
This deserves a little positive feedback - good for you, Zoe!
Regards,
Shodan
It also deals with the credit card and overspending as a psychological addiction. If you stop using the credit cards, and set up an emergency fund so the chance you’ll need to use the credit card is very small, then you won’t “remind” yourself how easy it is to use the credit cards for instant gratification.
Its a little like giving up the booze. If you drink when you are stressed or when you are social, a good step to being successful is to come up with ways to deal with the stress or the social without the booze - because you don’t want the trigger event to end up with a three week binge.
Overspending and overeating are some of the worst addictions to break, because we can’t live without spending and eating - so you can’t go cold turkey. But you can work to reduce the triggers.
A lot of the advice you see (especially from Ramsey) has as much to do with the psychology of smart finance choices as it has to do with the choices themselves.
You build up an emergency fund, and 3-6mo of savings, not because it’s the lowest cost option, but because it’s the option that allows you to function in a crisis without resorting to more borrowing. You pay off the smallest debt first, because you want to get a “win” under your belt, when the “right” financial choice is to pay off the highest interest debt first.
If you are a strong individual financially, and can stick to a budget while paying off your debts, then you may not need all of these pieces of advice. Of course, you probably wouldn’t be asking for advice, either. If you’ve gotten yourself into a debt problem, then this advice is good because it encourages smart choices, and gets you into a pattern of saving and spending that is sustainable.
Which is why Ramsey’s advice (et. al.) makes so little sense to the financially astute, for whom it is WRONG. Its generally good advice psychologically, even though he seldom maximizes the dollars.
Ramsey isnt preaching to the financially astute. His book is aimed at working-to-middle-class Americans, semi-specifically Christians (read the book - it gets pretty heavy on the Jesus stuff towards the end) who don’t have a lot of financial savoire faire and are in a huge assload of debt. Even the figures betray who he’s talking to; he talks about people buying a $90,000 house. Maybe you can buy a house for $90,000 in Moonshine Junction, OK, but around these parts $90,000 wouldn’t buy you half of a mediocre townhouse. He also goes to the trouble of specifically instructing his readers not to buy a trailer home. IF you have to actually say that, you’re not talking to the upper class.
Ramsey doesn’t dispense advice to the financially astute for the same reason UNICEF doesn’t send food and medicine to kids in Beverly Hills; they’re not the ones who need the help.
Incidentally, with regards to the OP, I did a quick search on apartments in SF. It is quite trivially easy to find nice, professionally managed apartments for a lot less than $2300 in SF, and that’s restricting my search to the City of San Francisco; go down the peninsula a bit and even better deals are waiting. You can get a really nice studio or 1-bedroom for $1600-$1800, and that’s to live in a very nice home. If your priority is saving money, you can go much lower.
$2300 is a preposterously high rent in SF for someone with debt problems.
This is harsh and untrue.
You are making a trade-off between an incremental $1000 to pay down debt or to fund an emergency account. Invested at 3% over 5 years, you earn $161 in a little fund.
Suppose you owe $1000 at 18% and will pay it down over 5 years. You pay $1287 in interest over 5 years, leaving you net down $1126. Over five years, this amounts to $19 p/m.
It is not unreasonable that people would be willing to make this trade-off for a bit of peace of mind or the desire not to take on any additional debt. This calculus improves for someone who believes he can pay off his debts substantially faster than 5 years. This advice is only “wrong” for those who dogmatically maximize every dollar. There is obviously nothing wrong with this, but it is not for everyone. Choosing another solution is not necessarily lacking in astuteness.
$100K a year doesn’t seem like a whole lot when you’re making it.
Where I live, it’s damn near average.
I didn’t mean it to come off as harsh, but from an accounting standpoint, it doesn’t maximize return - and therefore, to financial folks, its the wrong answer. You won’t pass an accounting class using Ramsey’s advice.
It is, however, a psychologically superior answer for most people.
Ditto. Per capita income for Manhattan (New York County) residents was $100k back in 2005.
Managing finances isn’t just about the numbers…it’s about behavior. That’s why Dave’s plan works for so many people.
I live in New York City where 100k per year is an awesome salary. I don’t know where you live that it’s mediocre.
My business card says I am a finance person, so apparently, reasonable people can differ. 
Funny you mention that. I see 100k per year as being very middle of the road. It’s less than what a first year attorney makes.
Taleb has some interesting if not exactly controversial remarks about this. Only in a Park Ave high rise in midtown could a law firm partner pulling down 500k per year think he is mediocre. What matters most is how you perceive yourself with respect to those you consider your peers, not the rest of the rabble.
It’s less than what a first-year attorney in a large, big-name law firm makes. But it’s a LOT more than the average NY wage. And well above the average even for a fair number of professional jobs, including attorneys. And a heck of a lot more than NYC median household income.
Yet, in the cite I linked above, it is precisely the per capita wage for Manhattan residents. A diverse place, NYC is.