There’s one particular nugget of advice that Sallie Krawcheck, a former Wall Street executive and founder and CEO of Ellevest, sees constantly — and doesn’t advise anyone to follow.
“If you’re taking the advice to build up your emergency fund before paying off credit card debt — that’s bad,” Krawcheck said during a panel at the S.H.E. Summit in New York City in October.
Krawcheck explained that credit card debt accrues the highest interest rates out there, and therefore paying it down should be prioritised above all other financial goals.
The maths speaks for itself, Krawcheck previously wrote in an article on Ellevest. She explained:
Say you have $5,000 of credit card debt at an 18% interest rate. Say you happen upon $5,000 of money. If you take some of the advice out there, and split the use of that $5,000 (half to establish an emergency fund, half to pay down credit card debt), you still have $2,500 of credit card debt and $2,500 of money sitting in cash.
The $2,500 of credit card debt at an 18% interest rate costs you $450 a year. The emergency fund earns almost nothing in interest. So you’re out $450.
But what if something comes up before you’ve paid it all off? If you happen to run into a true emergency in the interim, you can always put that on a credit card, Krawcheck said. But otherwise, work on getting rid of outstanding credit card debt off as quickly as possible.
That’s not to discredit emergency funds. If you’re not carrying high-interest debt, it’s important to work on setting aside three to six months worth of living expenses in case unexpected circumstances arise.
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