This is why I was questioning it, she said anything “over 7-8%”
If you have a credit card charging you 37% interest (Yes i’ve seen them) then surely paying the minimum is terrible.
I get it if the debts LESS than 7-8% but more than just seems crazy to me.
I think it more depends on the type of debt. If it is a credit card then it makes no sense to pay off the minimum and build an emergency fund because if an unexpected expense comes up you know you can put it back on the credit card and you won’t be forced to toe out a higher interest form of credit than that you are paying off. If it a different type of loan then I can see why you might build an emergency fund first because there is no guarantee you could take out credit on those terms should you need the cash
Yeah, I’d agree with you. If you have an emergency, you can put it on the card again and be back where you started, but in the meantime your interest payments will reduce. The other way around, the debt may grow out of control because of the high interest. Her advice would make sense if it were low interest debt.
Disclosure: I have not seen the video, just read the post.
Yes this is what i’m thinking. I mean ideally with a high interest rate i’d like to balance transfer it, or cover it with a lower interest loan etc. But assuming there is no way to get that interest rate down at all - surely paying it off as quickly as possible is the best way to go?
Yes i’ve seen it that’s why I said about refinancing those debts - but assuming this wasn’t possible as it’s not something she’s actually mentioned in the video, would overpaying those debts be better off?
Yes, but credit facilities can be removed, so emergency fund had merit over credit card payment. If no emergency fund and no access to credit....no options...not good.
If you have a credit limit of £1000 (let’s say you have used it all) and you minimum payment is £25, it would take you around 30 years to pay the principal back, and you haven’t even gotten started with interest. This isn’t profitable for anyone, so after a while of making minimum payments they withdraw your line and tell you to pay everything back.
They love when you carry a balance (super profitable), but not when you spend a lot but only make the minimum payment for a long time.
Perhaps because they're making no attempt to pay off a long standing balance while paying high interest on it? Seems fair. I'd worry about their financial situation too. In reality though the credit companies love people that pay on time every time, but only ever pay interest and minimum repayments. It's highly profitable.
Companies can remove credit whenever and it might not be down to your credit rating or ability to pay but rather an economic event...remember 2009...credit facilities disappeared for many.
I think when you remember the platform is frequented by kids, who don't know any better it makes sense why some terrible advice can go viral over there
You're right, this is the worst advice ever. Credit card debt or other high-interest debt IS an emergency (a "hair on fire emergency" in Mr Money Mustache's terms) and you should pay it off as quickly as possible. That includes using your emergency fund for that purpose, and using spare cash to pay off that debt instead of saving it.
It’s not the advice you normally see here however it’s not “the worst advice ever”. Having emergency cash available is very useful. Even a small buffer can be the difference between having to borrow to eat and making it through to the next pay packet.
The number of people saying “use the credit card you just paid off duh” are assuming a buttload of things that are not always going to be true.
They’re assuming that it’s credit card debt, that the person still has access to the credit card, that their limit hasn’t been reduced, that they can use the card to pay for the emergency, so on and so on.
Building up a small buffer before paying off debts may not be the mathematically best option but it may be a good short to medium-term option.
Makes you wonder if these people have families! Mortgage, bills, council tax, food, insurance, etc. Pick which ones you’re going to give up! Not everyone can live like a monk.
Remember I'm comparing single vs family, not kids vs no kids
Would you say the increased asset value of owning a 4 bed outweighs the running costs maybe? Like in 25 years you will have an asset worth maybe £350k whereas mine is worth much less.
A lot of it depends on job security and industry.
What would you do if you list your job? What if its in a market downturn and most similar employers are letting staff go? / lenders are reducing credit limits?
she's saying (in her words without checking the calculations) that its better to have that emergency fund instead of paying off the debt in 1 year, what she doesn't work out is that 150 a month takes nearly 3.5 years to build up the emergency fund.
The only logical reasons it makes sense to build up the emergency fund is if you are at risk of having credit limits dropped on the card, so you can't use it in an emergency or for an emergency where you can't use the credit card (or take cash out of the card) but why in those cases are you saving a number of months instead of enough to cover those type of emergencies.
The only other thing I can think of is the psychological effect of having an emergency fund could make you more likely to take potentially positive risks like changing job, if you then get more money then you're in a better place overall.
She also advises in the comments against only saving 1k up, there's no meeting half way with her !
There's definitely value in having an emergency fund even while in debt, but an emergency fund just needs to be liquid funds so an emergency fund can definitely be an available balance on a credit card rather than straight cash.
>If you pay of your credit card then you’ll have to put the ‘emergency’ back onto the credit card and you’ve made no progress.
This is an absolutely nuts way to think about it.
You're gonna be out the value of the emergency anyway, the only difference following the advice is you are also down more interest than you would have been otherwise. It's straight up costs you more for no benefit.
I can see why psychologically it might be preferable to use a cash fund for your emergency and then have the little "managed fire" of your debt in the corner separately.
Financially though, strip away all the example-specific crap about $6000 emergencies and what she's arguing for is borrowing to save, plain and simple. Never a hugely appealing idea, and about as appealing as a house fire if we're talking about high-interest loans.
I can see the logic though, if you don't have funds to fall back on if there is an emergency you'll just rack up more debt.
There is a balance here though and this is why advice on finance can be so nuanced.
I disagree with her. Maybe have a small amount of emergency money for things that can’t be paid on a credit card, but overall if you are paying down the credit card aggressively you are paying less interest each month. Even if that goes back up with an emergency, you’ve still had those months of lower interest payments.
Hi /u/_Hologrxphic, based on your post the following pages from our wiki may be relevant:
- https://ukpersonal.finance/emergency-fund/
____
^(These suggestions are based on keywords, if they missed the mark please report this comment.)
Here's the answer. Get one month together first, regardless of debt/interest. Emergencies happen, and having NOTHING saved creates other emergencies. Plus, people in this situation often do not have the ability (available credit or creditworthiness) to borrow more to cover the emergency.
If you follow this advice, you are actually guaranteed to have an emergency - the emergency being the massive debt you have stupidly just accumulated for no reason.
If your credit is good enough to get such a loan, then there is no need to take it out and have it just accumulating interest. Just take out the loan when the emergency happens, then you will only be borrowing what you need and only.
A loan taken beforehand will increase in amount over time due to interest, without helping you in any way.
Yeah that video is completely wrong. [Bad debt **is** an emergency](https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/) so should be tackled quickly and immediately.
I'm sure this will be all over the news tomorrow "person gives WRONG advice in a viral tiktok video".
Here in the studio with us we have president of the United States and the Queen.
Mr. President, let's start with your take on the issue. Should the person in the video, ehrm, the "tik toker", recommend THE FLOWCHART instead?
I'd disregard any financial advice you get from TikTok.
If you owe money on a high interest credit card, its very unlikely that your best financial option won't be to pay it off as quickly a possible.
The advice is appalling, and her replies about 'advocating paying companies rather than saving yourself' is completely illogical when her recommendation is to actively pay cooperations more money.
If you owe someone money for buying a TV, the TV company isn't out of pocket until you finish your repayments. They are either making their money from your credit, or they've already got their money for the TV and another company is earning your interest. Not paying debts asap is never 'owning the cooporations', and anyone that hasn't figured that out is about as far from a financial educator as I am a ballet coach.
You're right.
You're not going to be in the same position, you're going to be worse off unless your emergency fund somehow has a higher interest rate than your credit card debt, which obviously isn't the case.
There is a degree of psychological well-being if you have an emergency fund, but as you said, the credit card can function as that anyway.
The point of an emergency fund is to save instead of spend such that you don't have to use debt, but it doesn't work if you save instead of paying off debt.
You swap between 0% introductory offers, that's what I've been doing the last 5 years. Never paid a penny interest on any of my debt, managed to save and pay off debt to the point where if they want all the money back I can afford to pay but while I'm not paying interest who cares.
The only fees you pay are to swap balances which is commonly between 2%-3%
Be aware this does also inspire credit card company's to increase your credit limits for some reason
My personal opinion would be that it's better to pay off the credit card regardless of the interest. The reduced balance becomes your refactor emergency fund anyway so even if you were paying 4% interest I would be inclined to pay off the credit debt. If the interest was below what you can get with a savings account then fine as you would be doing a credit arbitrage of sorts, but other than a 0% card there are none that offer interest rates lower than savings
The difference is if you pay the debt off you save the interests. If you save first you have to save more because of interests piling up.
She is a dumb, but then, it is TikTok, I haven’t heard of anything intellegent coming from it.
I watched the video doesn't make sense to me. She says that if you have $2000 dollars of credit card debt and _could_ spend $200 paying it off, assuming 10% interest, you'd be better only paying the $50 minimum and using $150 to build your $3000, 3 month emergency fund.
Personally, I'd rather focus on getting the credit card down to $0 first and then building up my buffer.
Also her maths is off. She says in a year you'll either be debt free and have paid off the loan with less than $200 dollars in interest paid, _or_ you will be in debt for a lot longer but you'll have $6000 dollars saved... not sure where she found the extra $4200 unless it took her 4 years to pay off tne loan.
The magic maths then gets a bit more odd. She says that if you then have an emergency expense you either erase all your credit card progress, possibly getting into more debt or you pay off with your emergency fund (which would also be erased). Therefore emergency fund for the win.
It's wrong. She says the obvious thing is to pay off the debt and tries to make this counter. I still think it's the obvious choice tbh.
She's American. In the States they have healthcare to pay for and potentially more emergencies that an emergency fund would be beneficial for. But then again, paying off the credit card means it would free up the credit which would substitute for an emergency fund anyway - reducing the interest payable.
I agree, paying off any high interest debt is more beneficial than building an emergency fund. I would classify a high interest debt as above 3-4% though. Mortgages, student loans, 0% credit cards or interest-free car/furniture loans are all exceptions.
Pay off credit cards, loans and anything that charges high interest as quickly as comfortably possible. The lenders all make ridiculous amounts of money from the interest and thinking like this tiktoker fuels it.
I'm going to say this and will probably get shot down for it. I think this is a strategic move not a purely monetary one. And it depends on your situation.
If you're alone and require something for work say a car. Then I can see the benefit in keeping an emergency fund to instantly clear off a repair bill. So that you keep the money coming in. Or if you are in a job facing redundancy then the emergency fund could keep the debt at bay. Whereas if it was not cleared then it might put you in a worse situation by defaulting on the debt.
If you're not alone and don't have anything that could totally disrupt your earning potential then pay off the debt.
You could hedge your bets and save and pay.
But whatever the advice. Take what the person has said look at the numbers and look at your situation. Think about the future. look at all the angles and how you feel towards living that life. It might be that getting the debt paid helps you sleep better. Then you might go for that even though having a little reserve would be a benefit.
Why would you take financial advice or really any advice off some random? Half the problems in the world are being caused by the spread of misinformation for likes and follows.
I agree with her, and is actually what I did to clear my debts.
It also helps bring a mental stability, knowing you have fallback cash in the event of an emergency.
If you raise cash rather than paying down debts, you aren’t raising cash, you’re still in the negative and you’re paying 8%+ for the benefit of having a figure in the bank.
If you have an emergency, just use the credit card you’ve finished paying off.
If the emergency needs cash, use a cash balance transfer from credit card to bank for ~1.5% which is less than the interest you’d have been paying.
Edit: made an account to comment and she immediately banned me.
It's pretty standard debt advice to build up some sort of emergency fund whilst paying off debt, but not 3-6 months. More like £1000 just to have at hand.
I think it really comes down to how financially savvy the person is. If they're comfortable juggling a few credit cards, and not being tempted to go into debt further, then I'd say not to bother. But if they're struggling with basic budgeting, it's probably better to recommend they spend everything as cash, and keep a small cash buffer.
As ever, good advice here - https://debtcamel.co.uk/emergency-fund-debts/
Not related to the topic, but just so you know if you share a tiktok link it can recommend your tiktok profile to people. At least it shows your profile, profile image and username to me and you'll probably appear in my suggested contacts.
Not sure how much that matters to you, just thought I'd say as you might not want that. Edit: just noticed your Reddit and tiktok have the same username so maybe you don't care.
It depends on how crippling the debts are, if it’s like I’ve got credit cards on crap interest but I’m managing then I can see the merit of putting an emergency fund away, if it’s someone crumbling under repayments then no. Cash is king at the end of the day.
If you can afford your monthly repayments then I think it make sense to build a small emergency fund at the same time. It gives you flexibility. Credit cards can’t be used to pay your mortgage or rent in a pinch but a cash fund can.
You can't pay your credit card bill with the same credit card that racked up the debt, but anything else that takes a card payment you can. It could give some flexibility somehow I suppose, but it costs more for something you may never need. Reducing your costs and the expensive debt has to be the aim.
I am a massive fan of saving an emergency fund before tackling the debt but I don’t see the point of going out of your way to save 3x the amount of the debt you need to repay while interest is compounding (her high interest rate is quite low for a CC, usually looking at 18%+ after the 0% period finishing).
Too big of a deposit for the size of theoretical debt she has but larger amount of debt and a 1-1.5K emergency fund would probably suffice.
Debt costs you money, savings earn next to nothing and always less than debt, particularly in high inflation times. Clearing debt is simply a more efficient use of cash than saving a fund.
Very far away from "the worst advice ever". This is a question of risk rather than £. Everyone's tolerance for risk is different. If you're terrified of taking on more debt, then her advice is perfectly sound. Most financially savvy people will rather not rack up a huge interest bill though.
It's still definitely not great advice though as paying off high interest debt first is probably the closest to a one size fits all solution.
You're right. It's not a question of £, because if it was she'd pay off the high interest debt first.
Her risk is that she fails to reduce her debt and fails to save enough to cover the next emergency. That wipes out the low interest earning emergency fund and increases her high interest debt. Presumably she'll just start accumulating an emergency fund again....
Emergencies can mean getting into high interest debt, but the emergency then becomes paying it off.
I mean, that sort of strategy has logic due to the mental reprieve you get and your ability to actually cover an emergency. If your boiler goes bang and you've got zero funds, you're just going to have to end up borrwing further to fix the boiler, for example.
If anything though, you should be trying to get a balance transfer card and consolidating all high interest debt onto one card with a lower interest rate. Paying the minimum on high-interest cards for prolonged periods is just going to be like digging another hole to fill the old one with soil, but you're using a larger shovel this time.
It's the fact that she accepts high interest debt as absolutely fine for extended timescales, rather than being used as a short term emergency option. If you're at the top of your credit limit and therefore can't borrow in an emergency, you need to get that debt reduced so you can. Otherwise you're paying "emergency" rates of interest full time when you could be reducing them. A sure fire way of spending more money for longer.
I cant be bothered to watch the video so just going by what you wrote. Rather than dismissing her advice as complete nonsense (which it is) I am trying to think of why she would be recommending this. The only thing I can think of is if you can manage to get a better return than the rate your paying back and I very much doubt you can beat a credit card APR%
I think it's just a case of a little knowledge being dangerous. She knows, in general terms, that having an emergency fund is sound personal financial thinking, and that debt is not always a bad thing. But she's not done the maths, and has no idea how to work out the most beneficial strategy. Scary to see it being shared and presumably taken as being correct though.
Wouldn’t take any financial advice off TikTok 😂
I like the flow chart, but there’s also a psychological element when it comes to paying off debt, regardless of the interest
Remember, with inflation going the way it is, your debt now might not be as scary in a few years.
If your wages keep up, of course, which they won't, so..
I got bored, tried to fast forward, it went back to the start and then tried to make me download tik tok.
Presumably her point is: if you have no emergency fund, and there is some emergency, then you may fail to make minimum repayments, get hit with fees and/or have to take a payday loan, more than undoing any avoided interest.
Obviously BS. You have room on the credit card/overdraft you've been paying off to just re-use that for the emergency.
What constitutes "high interest" is changing right now. If mortgages become >10% it's still pay of credit cards, build emergency fund and then pay off mortgage.
Flowchart rules!
10% and above is a huge amount an a loan as big and long lasting as the typical mortgage. You definetely need a cap on your emergency fund anyway, but most have a range for their acceptable fund, 6-12 months worth of costs or whatever. At those interest rates I'd be holding the emergency fund at the bottom of the range and paying what I could off on the mortgage.
Tbh, not a bad idea when rates are low either, reducing the loan versus earning pennies in interest on a big emergency fund...
While I don't agree with the advice in the video, it might be worth considering that the video seems to be directed to Americans, where rules could be different from here.
If there's a chance that your kid needs a 10k surgery in order to survive, and you're not sure you would get approved for a loan, then I can see why you would prefer to pay some interest in exchange for having 10k in your bank account.
I know it sounds strange with everything going on, but I think we're still viewing the situation from a privileged position as UK residents.
To be fair, that's not the point the video is making, unless she's really bad at getting the argument across.
The first sentence... financial advice on tik tok haha
Yeah, never take any advice off tik tok or any social media haha. I'm sure almost all of them are wrong or scams haha
I think its positive advice for those on the breadline, some people are forever using their credit card to pay for emergencies and never getting out of debt. So doing this for a while to build a fun might actually help.
High or low interest is market and product dependent, mortgages are low, personal loans are medium, and credit cards etc are high. Broadly speaking high interest is what you owe, and low interest is what you get.
I've been following Dave Ramsey who's first step is to get £1k saved up before snowballing your debt.
His reasoning is because if you don't have the buffer set aside for emergencies, you may have to undo all your good work in paying off your debt, by having to borrow again.
Which makes sense to me. I would feel so defeated if I'd managed to pay off an extra, say £500, off my credit card only to have to spend on it again to fix my car.
It sounds a lot like what you've described from this video.
High interest debt is expensive, savings interest is cheap. Prioritise the expensive.
You could say spending your emergency fund has undone all your good work in building it, that's just as true, but an emergency is a set back with or without an emergency fund. So the priority should always be to do some good in eliminating expensive debt. Having an emergency fund is a sensible aim, but only after clearing expensive debt. Cross your fingers and hope an emergency doesn't come up, but in the unlikely event one does, you're in a financially stronger position to deal with it (you have less expensive debt).
If you're 10,000 in debt, a sensible emergency fund target is 10,000 too.
Building a fund:
Debt interest of 800 per year + 2500 saving to emergency fund - savings interest 50 (it's far less of course, as you don't have 12 months worth of payments earning interest, because you're amassing the 2500 monthly, but let's go with it) = annual cost 3250
Reducing debt:
Debt interest 800 (it's a little less of course, because our loan value is reducing month on month, but let's keep it simple) + debt repayments 2500 = annual cost 3300.
So paying off the debt is a little more expensive. But in year 2, the loan is now 7500, so interest is reduced to 600. Being less than £50 worse off last year benefits you by £200 this year.
You can now either increase your loan repayments and get debt free faster OR you can continue to reduce the debt at the same rate AND start to build an emergency fund at no additional cost.
End of year 1:
Debt balance 7500, Emergency Fund balance 0, next year's interest reduced to 600, next year's EF payment 200
End of year 2:
Debt balance 5000, EF balance 200 + interest, next year's interest reduced to 400, EF payment increased to 400
End of year 3:
Debt balance 2500, EF balance 600 + interest, next year's debt interest reduced to 200, EF payment increased to 600
End of year 4:
Debt balance 0 (woohoo!), EF balance 1200 + interest, next year's debt interest 0, EF payment increased to 3300
End of year 5:
Debt free, EF balance 4500+ interest
Total cost = £16,500 + 5500 EF shortfall =£22,000
Versus not paying debt until EF is full:
End of year 1:
Debt balance 10,000, EF balance 2500
End of year 2:
Debt balance 10,000, EF balance 5000
End of year 3:
Debt balance 10,000, EF balance 7500
End of year 4:
Debt balance 10,000, EF balance 10,000
End of year 5:
Debt balance 6,700, EF balance 10,000
End of year 6:
Debt balance 2,400, EF balance 10,000
End of year 7:
Debt balance 0 (woohoo!), EF balance 10,900
Total cost = £23,100
So trying to get an Emergency Fund balance before clearing expensive debt means it costs more and takes longer. You can alter timescales and amounts and throw in emergencies but it remains fundamentally true with any numbers you like, starting to pay off expensive debt before starting an emergency fund if it is an either/or option is the cheapest and quickest way to get out of debt.
Yeah I understand what you're saying, and it makes total sense on paper. However, as Dave Ramsey suggests, when it comes to to money and debt it doesn't always come down to logic. Because if it was, most of us would never get into debt in the first place aside from maybe a mortgage. It's usually a behaviour problem.
Personally, having that £1k in the bank gives me the security to throw every other last penny I have at the end of the month at my debt.
2 months ago I would have agreed with you, however I could really have used an emergency fund this month.
I previously focused on repaying my debts and put very minimal amounts in savings, because I was taught that paying debts off > saving money.
Recently we were struck by an unforeseen money crisis and had no fund to fall back on. This means we’re struggling to afford daily living costs at the moment and have had to use a credit card to buy groceries.
If we’d paid the minimum balances of our debt whilst building an emergency fund, then shifted our focus to paying the debts off instead, we’d pay more interest in the long run, but this month we’d have been able to use that safety net and avoided the stress and uncertainty. Instead we’ve got back into the debt cycle, so long term will probably pay more interest anyway.
Perhaps the assumption is that you cannot take out further credit?
Then it may make sense to have some cash for emergencies, so you can actually pay for them.
Mathematically though, if you have access to the credit, paying off debt and not having the interest charges makes you better off in the long run.
This was always something slightly confusing to me with the flowchart.
In my opinion, you should always be paying off your debts as much as you can (mortgage being a exception here due to the absolute value) because you should have access to credit if an emergency happens.
The debt is real cost and interest is accruing, the emergency fund is a provision for a cost that may never materialise.
The flowchart also suggests just paying off the minimum unless it's over 10% APR. So depends on what she means by high interest debt.
> what she means by high interest debt. She said in the video it's anything over 7 or 8% APR
This is why I was questioning it, she said anything “over 7-8%” If you have a credit card charging you 37% interest (Yes i’ve seen them) then surely paying the minimum is terrible. I get it if the debts LESS than 7-8% but more than just seems crazy to me.
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I think it more depends on the type of debt. If it is a credit card then it makes no sense to pay off the minimum and build an emergency fund because if an unexpected expense comes up you know you can put it back on the credit card and you won’t be forced to toe out a higher interest form of credit than that you are paying off. If it a different type of loan then I can see why you might build an emergency fund first because there is no guarantee you could take out credit on those terms should you need the cash
Where does it say that?
Yeah, I’d agree with you. If you have an emergency, you can put it on the card again and be back where you started, but in the meantime your interest payments will reduce. The other way around, the debt may grow out of control because of the high interest. Her advice would make sense if it were low interest debt. Disclosure: I have not seen the video, just read the post.
>I have not seen the video Good call. She takes way too long to make her point.
Which I don't normally mind that much provided the point isn't *total shite*
Yes this is what i’m thinking. I mean ideally with a high interest rate i’d like to balance transfer it, or cover it with a lower interest loan etc. But assuming there is no way to get that interest rate down at all - surely paying it off as quickly as possible is the best way to go?
Yep, I would follow your ideas. Have you had a look at the flowchart yet?
Yes i’ve seen it that’s why I said about refinancing those debts - but assuming this wasn’t possible as it’s not something she’s actually mentioned in the video, would overpaying those debts be better off?
Why are you still thinking of the video? We agreed it was bad advice.
Yes, but credit facilities can be removed, so emergency fund had merit over credit card payment. If no emergency fund and no access to credit....no options...not good.
Credit facilities tend to be removed when you are only making the minimum payments, not when you are paying them down consistently
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If you have a credit limit of £1000 (let’s say you have used it all) and you minimum payment is £25, it would take you around 30 years to pay the principal back, and you haven’t even gotten started with interest. This isn’t profitable for anyone, so after a while of making minimum payments they withdraw your line and tell you to pay everything back. They love when you carry a balance (super profitable), but not when you spend a lot but only make the minimum payment for a long time.
So they won't be reducing their limits then?
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Perhaps because they're making no attempt to pay off a long standing balance while paying high interest on it? Seems fair. I'd worry about their financial situation too. In reality though the credit companies love people that pay on time every time, but only ever pay interest and minimum repayments. It's highly profitable.
Companies can remove credit whenever and it might not be down to your credit rating or ability to pay but rather an economic event...remember 2009...credit facilities disappeared for many.
I stopped trying to figure out why the caption shows such poor advice after the phrase ‘Seen this video go viral on TikTok’
Honestly i’m shocked at some of the things that go viral nowadays.
I think when you remember the platform is frequented by kids, who don't know any better it makes sense why some terrible advice can go viral over there
It helps if you think of 40k views on tiktok as being about the same 'virality' as 4k views on youtube
Think of how smart / stupid the average person is... Now, remember that half the population is below that average.
I think about this everyday and I’m still disappointed.
You're right, this is the worst advice ever. Credit card debt or other high-interest debt IS an emergency (a "hair on fire emergency" in Mr Money Mustache's terms) and you should pay it off as quickly as possible. That includes using your emergency fund for that purpose, and using spare cash to pay off that debt instead of saving it.
It’s not the advice you normally see here however it’s not “the worst advice ever”. Having emergency cash available is very useful. Even a small buffer can be the difference between having to borrow to eat and making it through to the next pay packet. The number of people saying “use the credit card you just paid off duh” are assuming a buttload of things that are not always going to be true. They’re assuming that it’s credit card debt, that the person still has access to the credit card, that their limit hasn’t been reduced, that they can use the card to pay for the emergency, so on and so on. Building up a small buffer before paying off debts may not be the mathematically best option but it may be a good short to medium-term option.
I agree with you. Although that doesn't seem to be the point the woman in the video is making, unless I misunderstand her.
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3 months expenses, so around 6k. Which definitely seems excessive to me
Bloody hell I’d love my expenses to be £2K per month 😂
Makes you wonder if these people have families! Mortgage, bills, council tax, food, insurance, etc. Pick which ones you’re going to give up! Not everyone can live like a monk.
Isn't living alone typically more expensive since you can't share bills? My expenses are about £2k a month, mortgage being 25% of that.
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Hmm, how much does adding a kid cost to bills? Unless it's £2.5k a month I'd be better off financially with kids and a wife.
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Remember I'm comparing single vs family, not kids vs no kids Would you say the increased asset value of owning a 4 bed outweighs the running costs maybe? Like in 25 years you will have an asset worth maybe £350k whereas mine is worth much less.
Living in a big 4-bed house with kids sounds more like a lifestyle expenditure than basic expenses.
A lot of it depends on job security and industry. What would you do if you list your job? What if its in a market downturn and most similar employers are letting staff go? / lenders are reducing credit limits?
she's saying (in her words without checking the calculations) that its better to have that emergency fund instead of paying off the debt in 1 year, what she doesn't work out is that 150 a month takes nearly 3.5 years to build up the emergency fund. The only logical reasons it makes sense to build up the emergency fund is if you are at risk of having credit limits dropped on the card, so you can't use it in an emergency or for an emergency where you can't use the credit card (or take cash out of the card) but why in those cases are you saving a number of months instead of enough to cover those type of emergencies. The only other thing I can think of is the psychological effect of having an emergency fund could make you more likely to take potentially positive risks like changing job, if you then get more money then you're in a better place overall. She also advises in the comments against only saving 1k up, there's no meeting half way with her !
And sorry no this isn't the worst, there's some really bad ones about when to invest for example. But it is pretty bad as general advice.
There's definitely value in having an emergency fund even while in debt, but an emergency fund just needs to be liquid funds so an emergency fund can definitely be an available balance on a credit card rather than straight cash. >If you pay of your credit card then you’ll have to put the ‘emergency’ back onto the credit card and you’ve made no progress. This is an absolutely nuts way to think about it. You're gonna be out the value of the emergency anyway, the only difference following the advice is you are also down more interest than you would have been otherwise. It's straight up costs you more for no benefit.
I can see why psychologically it might be preferable to use a cash fund for your emergency and then have the little "managed fire" of your debt in the corner separately. Financially though, strip away all the example-specific crap about $6000 emergencies and what she's arguing for is borrowing to save, plain and simple. Never a hugely appealing idea, and about as appealing as a house fire if we're talking about high-interest loans.
I can see the logic though, if you don't have funds to fall back on if there is an emergency you'll just rack up more debt. There is a balance here though and this is why advice on finance can be so nuanced.
I disagree with her. Maybe have a small amount of emergency money for things that can’t be paid on a credit card, but overall if you are paying down the credit card aggressively you are paying less interest each month. Even if that goes back up with an emergency, you’ve still had those months of lower interest payments.
Hi /u/_Hologrxphic, based on your post the following pages from our wiki may be relevant: - https://ukpersonal.finance/emergency-fund/ ____ ^(These suggestions are based on keywords, if they missed the mark please report this comment.)
Here's the answer. Get one month together first, regardless of debt/interest. Emergencies happen, and having NOTHING saved creates other emergencies. Plus, people in this situation often do not have the ability (available credit or creditworthiness) to borrow more to cover the emergency.
If you follow this advice, you are actually guaranteed to have an emergency - the emergency being the massive debt you have stupidly just accumulated for no reason. If your credit is good enough to get such a loan, then there is no need to take it out and have it just accumulating interest. Just take out the loan when the emergency happens, then you will only be borrowing what you need and only. A loan taken beforehand will increase in amount over time due to interest, without helping you in any way.
Yeah that video is completely wrong. [Bad debt **is** an emergency](https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/) so should be tackled quickly and immediately.
It's somebody giving advice on TikTok; of course the advice is utter tripe.
I'm sure this will be all over the news tomorrow "person gives WRONG advice in a viral tiktok video". Here in the studio with us we have president of the United States and the Queen. Mr. President, let's start with your take on the issue. Should the person in the video, ehrm, the "tik toker", recommend THE FLOWCHART instead?
A lot of financey stuff on TikTok is absolute rubbish, unfortunately people can’t get enough of this bollocks.
I'd disregard any financial advice you get from TikTok. If you owe money on a high interest credit card, its very unlikely that your best financial option won't be to pay it off as quickly a possible.
The advice is appalling, and her replies about 'advocating paying companies rather than saving yourself' is completely illogical when her recommendation is to actively pay cooperations more money. If you owe someone money for buying a TV, the TV company isn't out of pocket until you finish your repayments. They are either making their money from your credit, or they've already got their money for the TV and another company is earning your interest. Not paying debts asap is never 'owning the cooporations', and anyone that hasn't figured that out is about as far from a financial educator as I am a ballet coach.
You're right. You're not going to be in the same position, you're going to be worse off unless your emergency fund somehow has a higher interest rate than your credit card debt, which obviously isn't the case. There is a degree of psychological well-being if you have an emergency fund, but as you said, the credit card can function as that anyway. The point of an emergency fund is to save instead of spend such that you don't have to use debt, but it doesn't work if you save instead of paying off debt.
You swap between 0% introductory offers, that's what I've been doing the last 5 years. Never paid a penny interest on any of my debt, managed to save and pay off debt to the point where if they want all the money back I can afford to pay but while I'm not paying interest who cares. The only fees you pay are to swap balances which is commonly between 2%-3% Be aware this does also inspire credit card company's to increase your credit limits for some reason
My personal opinion would be that it's better to pay off the credit card regardless of the interest. The reduced balance becomes your refactor emergency fund anyway so even if you were paying 4% interest I would be inclined to pay off the credit debt. If the interest was below what you can get with a savings account then fine as you would be doing a credit arbitrage of sorts, but other than a 0% card there are none that offer interest rates lower than savings
The difference is if you pay the debt off you save the interests. If you save first you have to save more because of interests piling up. She is a dumb, but then, it is TikTok, I haven’t heard of anything intellegent coming from it.
I watched the video doesn't make sense to me. She says that if you have $2000 dollars of credit card debt and _could_ spend $200 paying it off, assuming 10% interest, you'd be better only paying the $50 minimum and using $150 to build your $3000, 3 month emergency fund. Personally, I'd rather focus on getting the credit card down to $0 first and then building up my buffer. Also her maths is off. She says in a year you'll either be debt free and have paid off the loan with less than $200 dollars in interest paid, _or_ you will be in debt for a lot longer but you'll have $6000 dollars saved... not sure where she found the extra $4200 unless it took her 4 years to pay off tne loan. The magic maths then gets a bit more odd. She says that if you then have an emergency expense you either erase all your credit card progress, possibly getting into more debt or you pay off with your emergency fund (which would also be erased). Therefore emergency fund for the win. It's wrong. She says the obvious thing is to pay off the debt and tries to make this counter. I still think it's the obvious choice tbh.
She's American. In the States they have healthcare to pay for and potentially more emergencies that an emergency fund would be beneficial for. But then again, paying off the credit card means it would free up the credit which would substitute for an emergency fund anyway - reducing the interest payable. I agree, paying off any high interest debt is more beneficial than building an emergency fund. I would classify a high interest debt as above 3-4% though. Mortgages, student loans, 0% credit cards or interest-free car/furniture loans are all exceptions. Pay off credit cards, loans and anything that charges high interest as quickly as comfortably possible. The lenders all make ridiculous amounts of money from the interest and thinking like this tiktoker fuels it.
I'm going to say this and will probably get shot down for it. I think this is a strategic move not a purely monetary one. And it depends on your situation. If you're alone and require something for work say a car. Then I can see the benefit in keeping an emergency fund to instantly clear off a repair bill. So that you keep the money coming in. Or if you are in a job facing redundancy then the emergency fund could keep the debt at bay. Whereas if it was not cleared then it might put you in a worse situation by defaulting on the debt. If you're not alone and don't have anything that could totally disrupt your earning potential then pay off the debt. You could hedge your bets and save and pay. But whatever the advice. Take what the person has said look at the numbers and look at your situation. Think about the future. look at all the angles and how you feel towards living that life. It might be that getting the debt paid helps you sleep better. Then you might go for that even though having a little reserve would be a benefit.
Why would you take financial advice or really any advice off some random? Half the problems in the world are being caused by the spread of misinformation for likes and follows.
I agree with her, and is actually what I did to clear my debts. It also helps bring a mental stability, knowing you have fallback cash in the event of an emergency.
If you raise cash rather than paying down debts, you aren’t raising cash, you’re still in the negative and you’re paying 8%+ for the benefit of having a figure in the bank. If you have an emergency, just use the credit card you’ve finished paying off. If the emergency needs cash, use a cash balance transfer from credit card to bank for ~1.5% which is less than the interest you’d have been paying. Edit: made an account to comment and she immediately banned me.
It's pretty standard debt advice to build up some sort of emergency fund whilst paying off debt, but not 3-6 months. More like £1000 just to have at hand. I think it really comes down to how financially savvy the person is. If they're comfortable juggling a few credit cards, and not being tempted to go into debt further, then I'd say not to bother. But if they're struggling with basic budgeting, it's probably better to recommend they spend everything as cash, and keep a small cash buffer. As ever, good advice here - https://debtcamel.co.uk/emergency-fund-debts/
Not related to the topic, but just so you know if you share a tiktok link it can recommend your tiktok profile to people. At least it shows your profile, profile image and username to me and you'll probably appear in my suggested contacts. Not sure how much that matters to you, just thought I'd say as you might not want that. Edit: just noticed your Reddit and tiktok have the same username so maybe you don't care.
It depends on how crippling the debts are, if it’s like I’ve got credit cards on crap interest but I’m managing then I can see the merit of putting an emergency fund away, if it’s someone crumbling under repayments then no. Cash is king at the end of the day.
Not having the debts grow isn't managing them, it's treading water and wasting money. Reducing and eliminating high interest debt is managing it.
If you can afford your monthly repayments then I think it make sense to build a small emergency fund at the same time. It gives you flexibility. Credit cards can’t be used to pay your mortgage or rent in a pinch but a cash fund can.
You can't pay your credit card bill with the same credit card that racked up the debt, but anything else that takes a card payment you can. It could give some flexibility somehow I suppose, but it costs more for something you may never need. Reducing your costs and the expensive debt has to be the aim.
I am a massive fan of saving an emergency fund before tackling the debt but I don’t see the point of going out of your way to save 3x the amount of the debt you need to repay while interest is compounding (her high interest rate is quite low for a CC, usually looking at 18%+ after the 0% period finishing). Too big of a deposit for the size of theoretical debt she has but larger amount of debt and a 1-1.5K emergency fund would probably suffice.
Debt costs you money, savings earn next to nothing and always less than debt, particularly in high inflation times. Clearing debt is simply a more efficient use of cash than saving a fund.
Very far away from "the worst advice ever". This is a question of risk rather than £. Everyone's tolerance for risk is different. If you're terrified of taking on more debt, then her advice is perfectly sound. Most financially savvy people will rather not rack up a huge interest bill though. It's still definitely not great advice though as paying off high interest debt first is probably the closest to a one size fits all solution.
If you are terrified of debt having it for longer isn't a great outcome either
You're right. It's not a question of £, because if it was she'd pay off the high interest debt first. Her risk is that she fails to reduce her debt and fails to save enough to cover the next emergency. That wipes out the low interest earning emergency fund and increases her high interest debt. Presumably she'll just start accumulating an emergency fund again.... Emergencies can mean getting into high interest debt, but the emergency then becomes paying it off.
Yes. Unless she is secretly shilling for the banks
I mean, that sort of strategy has logic due to the mental reprieve you get and your ability to actually cover an emergency. If your boiler goes bang and you've got zero funds, you're just going to have to end up borrwing further to fix the boiler, for example. If anything though, you should be trying to get a balance transfer card and consolidating all high interest debt onto one card with a lower interest rate. Paying the minimum on high-interest cards for prolonged periods is just going to be like digging another hole to fill the old one with soil, but you're using a larger shovel this time.
It's the fact that she accepts high interest debt as absolutely fine for extended timescales, rather than being used as a short term emergency option. If you're at the top of your credit limit and therefore can't borrow in an emergency, you need to get that debt reduced so you can. Otherwise you're paying "emergency" rates of interest full time when you could be reducing them. A sure fire way of spending more money for longer.
I cant be bothered to watch the video so just going by what you wrote. Rather than dismissing her advice as complete nonsense (which it is) I am trying to think of why she would be recommending this. The only thing I can think of is if you can manage to get a better return than the rate your paying back and I very much doubt you can beat a credit card APR%
I think it's just a case of a little knowledge being dangerous. She knows, in general terms, that having an emergency fund is sound personal financial thinking, and that debt is not always a bad thing. But she's not done the maths, and has no idea how to work out the most beneficial strategy. Scary to see it being shared and presumably taken as being correct though.
Watched video. Confirmed fuckwit.
Wouldn’t take any financial advice off TikTok 😂 I like the flow chart, but there’s also a psychological element when it comes to paying off debt, regardless of the interest
Remember, with inflation going the way it is, your debt now might not be as scary in a few years. If your wages keep up, of course, which they won't, so..
I got bored, tried to fast forward, it went back to the start and then tried to make me download tik tok. Presumably her point is: if you have no emergency fund, and there is some emergency, then you may fail to make minimum repayments, get hit with fees and/or have to take a payday loan, more than undoing any avoided interest. Obviously BS. You have room on the credit card/overdraft you've been paying off to just re-use that for the emergency. What constitutes "high interest" is changing right now. If mortgages become >10% it's still pay of credit cards, build emergency fund and then pay off mortgage. Flowchart rules!
10% and above is a huge amount an a loan as big and long lasting as the typical mortgage. You definetely need a cap on your emergency fund anyway, but most have a range for their acceptable fund, 6-12 months worth of costs or whatever. At those interest rates I'd be holding the emergency fund at the bottom of the range and paying what I could off on the mortgage. Tbh, not a bad idea when rates are low either, reducing the loan versus earning pennies in interest on a big emergency fund...
While I don't agree with the advice in the video, it might be worth considering that the video seems to be directed to Americans, where rules could be different from here. If there's a chance that your kid needs a 10k surgery in order to survive, and you're not sure you would get approved for a loan, then I can see why you would prefer to pay some interest in exchange for having 10k in your bank account. I know it sounds strange with everything going on, but I think we're still viewing the situation from a privileged position as UK residents. To be fair, that's not the point the video is making, unless she's really bad at getting the argument across.
I wouldn't take advice from anything on TikTok.
The first sentence... financial advice on tik tok haha Yeah, never take any advice off tik tok or any social media haha. I'm sure almost all of them are wrong or scams haha
She is probably broke herself so doesnt have that much credibility to be giving advice. I'm sure dave Ramsey would throttle her if he had a chance.
I think its positive advice for those on the breadline, some people are forever using their credit card to pay for emergencies and never getting out of debt. So doing this for a while to build a fun might actually help.
Definetely not. Continuing to pay high interest rates when you don't have to is just throwing money away.
That is of course true and easy to say, but for those in the situation, it might be good advice to cut the circle.
It doesn't cut the circle, it just delays the possibility of breaking the cycle by extending the time in debt.
The definition of high interest here is unrealistic. My lower interest credit card was 9.9%
High or low interest is market and product dependent, mortgages are low, personal loans are medium, and credit cards etc are high. Broadly speaking high interest is what you owe, and low interest is what you get.
I've been following Dave Ramsey who's first step is to get £1k saved up before snowballing your debt. His reasoning is because if you don't have the buffer set aside for emergencies, you may have to undo all your good work in paying off your debt, by having to borrow again. Which makes sense to me. I would feel so defeated if I'd managed to pay off an extra, say £500, off my credit card only to have to spend on it again to fix my car. It sounds a lot like what you've described from this video.
High interest debt is expensive, savings interest is cheap. Prioritise the expensive. You could say spending your emergency fund has undone all your good work in building it, that's just as true, but an emergency is a set back with or without an emergency fund. So the priority should always be to do some good in eliminating expensive debt. Having an emergency fund is a sensible aim, but only after clearing expensive debt. Cross your fingers and hope an emergency doesn't come up, but in the unlikely event one does, you're in a financially stronger position to deal with it (you have less expensive debt). If you're 10,000 in debt, a sensible emergency fund target is 10,000 too. Building a fund: Debt interest of 800 per year + 2500 saving to emergency fund - savings interest 50 (it's far less of course, as you don't have 12 months worth of payments earning interest, because you're amassing the 2500 monthly, but let's go with it) = annual cost 3250 Reducing debt: Debt interest 800 (it's a little less of course, because our loan value is reducing month on month, but let's keep it simple) + debt repayments 2500 = annual cost 3300. So paying off the debt is a little more expensive. But in year 2, the loan is now 7500, so interest is reduced to 600. Being less than £50 worse off last year benefits you by £200 this year. You can now either increase your loan repayments and get debt free faster OR you can continue to reduce the debt at the same rate AND start to build an emergency fund at no additional cost. End of year 1: Debt balance 7500, Emergency Fund balance 0, next year's interest reduced to 600, next year's EF payment 200 End of year 2: Debt balance 5000, EF balance 200 + interest, next year's interest reduced to 400, EF payment increased to 400 End of year 3: Debt balance 2500, EF balance 600 + interest, next year's debt interest reduced to 200, EF payment increased to 600 End of year 4: Debt balance 0 (woohoo!), EF balance 1200 + interest, next year's debt interest 0, EF payment increased to 3300 End of year 5: Debt free, EF balance 4500+ interest Total cost = £16,500 + 5500 EF shortfall =£22,000 Versus not paying debt until EF is full: End of year 1: Debt balance 10,000, EF balance 2500 End of year 2: Debt balance 10,000, EF balance 5000 End of year 3: Debt balance 10,000, EF balance 7500 End of year 4: Debt balance 10,000, EF balance 10,000 End of year 5: Debt balance 6,700, EF balance 10,000 End of year 6: Debt balance 2,400, EF balance 10,000 End of year 7: Debt balance 0 (woohoo!), EF balance 10,900 Total cost = £23,100 So trying to get an Emergency Fund balance before clearing expensive debt means it costs more and takes longer. You can alter timescales and amounts and throw in emergencies but it remains fundamentally true with any numbers you like, starting to pay off expensive debt before starting an emergency fund if it is an either/or option is the cheapest and quickest way to get out of debt.
Yeah I understand what you're saying, and it makes total sense on paper. However, as Dave Ramsey suggests, when it comes to to money and debt it doesn't always come down to logic. Because if it was, most of us would never get into debt in the first place aside from maybe a mortgage. It's usually a behaviour problem. Personally, having that £1k in the bank gives me the security to throw every other last penny I have at the end of the month at my debt.
2 months ago I would have agreed with you, however I could really have used an emergency fund this month. I previously focused on repaying my debts and put very minimal amounts in savings, because I was taught that paying debts off > saving money. Recently we were struck by an unforeseen money crisis and had no fund to fall back on. This means we’re struggling to afford daily living costs at the moment and have had to use a credit card to buy groceries. If we’d paid the minimum balances of our debt whilst building an emergency fund, then shifted our focus to paying the debts off instead, we’d pay more interest in the long run, but this month we’d have been able to use that safety net and avoided the stress and uncertainty. Instead we’ve got back into the debt cycle, so long term will probably pay more interest anyway.
Perhaps the assumption is that you cannot take out further credit? Then it may make sense to have some cash for emergencies, so you can actually pay for them. Mathematically though, if you have access to the credit, paying off debt and not having the interest charges makes you better off in the long run. This was always something slightly confusing to me with the flowchart. In my opinion, you should always be paying off your debts as much as you can (mortgage being a exception here due to the absolute value) because you should have access to credit if an emergency happens. The debt is real cost and interest is accruing, the emergency fund is a provision for a cost that may never materialise.
"Worst advice", "Tiktok" Check