Paying Off Credit Card Debt vs Building An Emergency Fund

[The Budget Man]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

When we were paying off debt, we did so without too much knowledge. I agree that by using the EF to pay off the debt that you are actually saving in a way because it frees up the same amount in your credit card if you need it. My other pet peeve is that your savings account is also earning interest. You not only are paying the interest on the debt, but you are being taxed at 15% or whatever your income is just for a peace of mind that you already will have by freeing up some of your credit. Most of us forgot that credit used to be used as an emergency not as it is today. I would also suggest that people keep cash on hand at home for many reasons. For one, there are certain things that you can't put on a crefit card. One could be lunch for the kids, a birthday card, children's photos from school. And the last time I checked, you can't pay your car insurance or property taxes with a credit card. Anyway, a small cushion at home would be good and it could be reimbursed at the end of the month.

Here's a question that I find helpful for credit cards.....

What are the two things you get every time you use your Credit Card?

1. The item or service you wanted.

AND the one we forget...

2. A debt

The result of every Credit Card transaction is a debt!!!

Enjoy Your Money
The Budget Man

There are two groundbreaking chapters on Credit Cards in the new book... "Budgeting Made Simple"

http://www.personalitybudgeting.com/Budgeting_Made_Simple.html

[Aleta]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

I didn't say that I thought people should use the credit card as a normal cash card. It should only be used in an emergency. (a real emergency). Frankly, we pay ours off every month and I use their money and I make interest until it is paid. There are upsides to credit cards but you have to be responsible enought to use them.

[jIM_Ohio]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

CC are a matter of leverage. Using EF to pay off debt is leverage. There is also the issue of "free cash flow" within a budget to be a short term emergency fund.

Pay off debt before saving. If you have a EF and incur debt, pay off the debt (unless your EF is earning you more interest than the debt is costing you- quite rare).

CC to cover an emergency work well in a two day-7 day span. If your car breaks down and you need a car for a business trip the next day or next week... most car rental places REQUIRE a CC to secure the rental (even if you pay in cash at end of week). Hotel rooms require additional cash up front if you secure room with cash as well.

Using CC to handle the emergency within 2-3 days of when it occurs is acceptable (I do this all the time).

Paying off the CC becomes a matter of having a EF and/or having free cash flow within the budget. My wife and I know that one of her paychecks is "banked" every month (one of her paychecks is same as monthly budget for IRAs). If we had no car payments, 100% of her monthly pay would be banked. So we can handle any incidental/unexpected bill equal to one of my wife's paychecks without touching EF.

This doesn't even take into account our 401ks are withdrawn before we get paid, we could always increase take home pay and stop 401ks. Budgeting is the key... knowing how much "free cash flow" you have is important to handling the size of emergencies.

[cantretire]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

But what about emergencies that you can't use a CC for? Example: A few years ago I was unemployed and uninsured. I got the worst toothache of my life. Turns out I needed a root canal and crown. Doctor wanted over $1,000 upfront, cash, check or MO, BEFORE he would touch it - even for those with insurance. He just didn't want to wait for the reimbursement check or to trust the patient to make monthly payments. I had to borrow the money from my parents. If it wasn't for them, I would have had to go for the cheaper route of having the tooth pullesd.

[jIM_Ohio]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

But what about emergencies that you can't use a CC for? Example: A few years ago I was unemployed and uninsured. I got the worst toothache of my life. Turns out I needed a root canal and crown. Doctor wanted over $1,000 upfront, cash, check or MO, BEFORE he would touch it - even for those with insurance. He just didn't want to wait for the reimbursement check or to trust the patient to make monthly payments. I had to borrow the money from my parents. If it wasn't for them, I would have had to go for the cheaper route of having the tooth pullesd.

A root canal is an example of why you might want cash...
but you were also uninsured and unemployed... so you were in a situation of one problem amplifying the other.

CC are not the end all, cure all to an EF... but I would suggest they can bridge at least 50% of problems... and you could have taken the cash advance off card if needed.

My stance is cash needs to be working for me, or I'll be working for cash a lot longer.

[Aleta]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

There are still some items that you need cash for. If you have kids and they have school lunches, you need cash. There are things that you buy that can only be done with cash. Sometimes you can't get to a bank. I live in Florida and if you don't have cash around during Hurricane season, you'll be out of luck. The only thing that they take is cash. ATM's don't work or too many people take money out and the ATM runs out. YOU NEED CASH and you need an Emergency account. My husband is self-employed and has to have more emergency cash than most people would.

[jIM_Ohio]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

I never said "no cash"... understand the thread started by commenting on "pay down debt" or "hold cash"... in this situation, I strongly advocate paying down debt, holding close to zero cash. Why wait for an emergency which may or may not happen?

I am debt free and have 1 months cash on hand. The rest is "working" somewhere and might be tied up for 3-5 days while I get access to it. If I need to use it before 3-5 days, CC is my way to get it.

If I knew a hurricane is coming, I would have 3 days to get it.... Hurricanes don't just form overnight.

[Aleta]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

jIM: I totally agree with you. We have often wondered why the same people go to Home Depot and buy plywood over and over again? You're right that you do have time, but unfortunately, even though you're prepared their are so many things to do. You have to gas up your car and cans and that is usually a long line. You need to pick up last minute items to last a couple of weeks, preparing for maybe evacuation for your animals as well, maybe having to rent a hotel room if you're asked to evacuate, bringing in all of your property from outside, putting up shutters, calling and making sure that your friends and family all have a place to go for. As you can tell by my response that money isn't your only concern during an oncoming hurricane.

[cantretire]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

Cash advance at 20%???? No way. I'll keep the emergency cash fund.

[jIM_Ohio]

Re: Paying Off Credit Card Debt vs Building An Emergency Fund

Cash advance at 20%???? No way. I'll keep the emergency cash fund.

I pay 0-9% for my advances. In an emergency, not an issue. It will be paid off quickly with cash flow from other sources.

We have close to $1100/month liquid cash in our budget. We contribute this to an IRA, and could easily stop one months payment to pay the bill on the CC.

[loanstar]

I'd favour paying of the the debt simply because by paying back that money into the credit card, it would still be available, should you need to borrow it again. on the other hand, keeping it in an emergency fund costs you, i.e. interest charged as well as the debt reflecting badly on your credit rating.

[s.jenkins]

do they have to be mutually exclusive, though?

[fruitbowlk]

I have choosen to save money in my EF and pay off my cc debt. I'm no longer able to use the card and refuse to get another one so I need some money saved up if something happens. Ex. Last Dec my car broke down and I have no cc's and I had no money saved up I had to wait a week to get paid and get my car fixed. That was a pain We have two different location that we have to be at and one location is further than the other. I only have one cc debt that is 4600 and I'm saving up 1000 to cover emergencies then I'm going to go full force and pay off my cc debt. Hopefully within a year or a year in a half.

[nextel500]

I have choosen to save money in my EF and pay off my cc debt. I'm no longer able to use the card and refuse to get another one so I need some money saved up if something happens. Ex. Last Dec my car broke down and I have no cc's and I had no money saved up I had to wait a week to get paid and get my car fixed. That was a pain We have two different location that we have to be at and one location is further than the other. I only have one cc debt that is 4600 and I'm saving up 1000 to cover emergencies then I'm going to go full force and pay off my cc debt. Hopefully within a year or a year in a half.

i agree with your statement, but if you have debt I think it is best to pay down debt, however, it depends what the APR is vs the APY in your savings account or money market or whatever investment vehicle you are using.