In Money

Use your credit card as an emergency fund

Surprising coming from a PF (personal finance) blogger?

Not really.

Anyone who is in any kind of debt that charges a significant interest rate should pay their debts first over saving any kind of emergency fund.

emergency-fund-cash-money-bills-USD

Those who are in credit card debt, would be better off paying every penny they had towards that debt, and using that credit card if an emergency arises.

Frankly they’d be earning more interest savings by clearing a 19% credit card than stashing it in a 1% high interest savings account.

They’d “earn” about 18% more by clearing the card and not having to pay extra interest than if they had $1000 or an EF sitting in a bank account.

YOU WOULD PAY MORE IN INTEREST BY NOT CLEARING YOUR DEBT FIRST

Just look at the math, it never lies:

Use-your-credit-card-as-an-emegency-fund

 

As you can see, if you have $10K in debt that you are paying 19% interest on, you are basically paying $1889.17 a year for nothing if you saved the money instead.


(I’ve obviously taken a few liberties in the math by not also scaling down the amount of debt over time which would also result in slightly lower “lost” payments to interest. This is just a simple, straight forward example to show you that the math doesn’t lie.)

CAVEAT EMPTOR! (Latin for “Buyer beware”)

This only works if you know and do the following:

  1. You know the difference between an emergency and an impulse (e.g. medical bill = emergency; new TV = NOT)
  2. You are putting every penny you have that you’d normally save in an emergency fund towards your debt
  3. You are NOT able to get a high-interest savings account that pays out MORE in interest (e.g. 20%) than your debt takes
  4. You are able to dip back into the line of credit or credit card if a (true) emergency arises

Otherwise, saving your money into an emergency fund is a silly idea unless you psychologically feel better doing so, and can’t sleep at night unless you have SOMETHING in your bank account, no matter how much money you’re losing each year.

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Sherry of Save. Spend. Splurge.

Millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. Since then, I have paid my $600K home in cash (my half was $300K), my $180K casr in cash, worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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