Beating Broke

Personal Finance from the Broke Perspective

Credit Cards as Emergency Funds

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Everybody knows they need an emergency fund.  Right?  Right.  There’s some argument about how much to keep in your emergency fund, but the general rule is no less than $1000 and ideally 6-12 months of expenses.  And common savings strategies says that you should keep that money in a nice comfy savings account that you can access as needed.  But, let me play devils advocate for a minute here.  Let’s say you had $1000 in your emergency fund.  What could you do with that $1000 if it were freed up and spendable?  What if, instead of having your emergency fund in a savings account, you used a credit card that had no balance on it?

You read that right.  A credit card.

Take you’re average credit card with a $1000 to $5000 credit limit (higher if needed) and keep no balance on it.  You’ve got a ready made source of funds, up to the limit, that you can access from just about anywhere.  And, it frees up your emergency fund savings to pay down debt.  Or invest.  Or, you can still keep it in a savings if you want and just use the credit card to supplement the emergency fund so you don’t have to keep such a high balance on it.

Pros and Cons (My wife likes these lists and always makes me write one when making big decisions…)

Let’s look at the pros for using a credit card as an emergency fund.

  • Cash is freed up for investing/paying down debt.  Why earn 1% on your emergency fund cash when you could be paying off debt that you’re paying 10% or more on?  Or, that you could be investing and possibly earning a nice return on?
  • No balance needed.  The card would be dedicated to the emergency use, so you wouldn’t carry a balance on it unless you had an emergency.
  • Available anywhere.  You can instantly access your emergency fund from anywhere your card is accepted.  Which is virtually anywhere.

Now, let’s look at the cons for using a credit card as an emergency fund.

  • Card could be closed.  If you don’t carry a balance and never need it, there’s a chance that the card company could close your account and you wouldn’t be able to use it when you needed it.  There are ways around that.  You could use it for a specific bill each month and then pay it off just like you would if you were paying the bill normally.  Problems could arise if you don’t pay that balance though and fill up the card.  Then you wouldn’t be able to use it either.
  • Interest charges.  Nobody likes paying interest on anything.  If the emergency is big enough and bad enough that you aren’t able to pay it off right away, you’ll start racking up interest.  That can lead to a quick spiral into the same debt boat that you were in to begin with.  Or worse.

I don’t know if I could recommend using a credit card as your only means of an emergency fund.  But, I think you could make a pretty good argument for using one to supplement your current emergency fund.  Let’s say your goal is to have 3 months expenses in your emergency fund.  And that your expense are $5000 a month.  That’s $15000 that will just be sitting in a bank doing nothing more than earning 1% interest. If you’ve got a card with a $10000 limit on it, you could pare that down to just $5000 in the bank and use the other $10000 to pay off a bill.  Or invest in something.

I think the biggest problem with using a method like this is the potential pitfalls.  If you are unable to keep the card active and balance free, you’ll have problems using it when you need it.  If you do need it and are able to use it, but not pay it off, you could potentially end up in the deep water again.  On the other hand, if you use up a cash emergency fund, you still need to pay it off, but you won’t have to pay interest on the part you used.

Using a credit card as an emergency fund is doable.  But, I can’t suggest it for any but the most disciplined.  One wrong step, and you could end up having more of an emergency than you would have normally if you just had a cash emergency fund.  And that could lead to disaster.

What do you think?

Now, I want to know your opinion.  Would you consider using a credit card as part (or whole) of your emergency fund?  What about using a line of credit as an emergency fund source? Would higher interest rates on savings change your mind? What pros and cons did I miss?

Interview with Debt Free for Life Author, David Bach

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Recently, I got the chance to review David Bachs new book, “Debt Free for Life” (Look for the review coming up on Yakezie.com!). David was kind enough to answer a few questions that I send to him. Some great stuff in there as well! Here’s the interview:

BB: Most of your previous books seem to be aimed towards people who, while likely in debt, just need a bit of a push in the right direction. Debt Free for Life, however, seems to be aimed more at people who are deep in debt and spiraling out of control. Is that what you intended? If so, what made you decide to move in that direction?

David:

For over two years I have been a weekly contributor on NBC’s Today Money 911 segment, where viewers ask me live financial questions. These questions used to be primarily focused on investment and wealth building; however, over the months I noticed that debt related questions started to dominate the segment week after week. I was also getting tons of debt questions from people on my website (www.finishrich.com ) and on my Facebook page (www.facebook.com/davidbach ). So, I decided to write Debt Free For Life as a guide intended for anyone who has debt and wants to get out—fast!

It offers an honest plan that will work—if you work it. I know some people are picking up my book because they are really drowning in debt and are looking for a life preserver. I believe this book can be the life raft that gets those people back to dry land. But let me be clear: you don’t need to be in over your head to benefit from my book. The truth is when you’re in debt; it doesn’t matter if you owe $1,000 or $100,000. I believe all debt is bad debt if you don’t have an action plan to pay if off. Debt Free For Life is about a totally new approach to building financial freedom that stresses “paying down your debt” so you can take control of your financial life. I teach my readers a revolutionary new system that makes paying off your debt easier than it ever has been—no matter how much you owe!

BB: You spend a good deal of the book talking about subjects like debt settlement, time-barred debt, and bankruptcy.  Those are topics that seem to be frowned upon by many of the mainstream personal finance folks. Were you afraid, while writing and publishing the book, that those same personal finance people would chastise you for bringing the subjects up?

David:

No, I wasn’t afraid to bring up those subjects. People should be educated about the good, the bad and the ugly of personal finances –each person’s situation is different – so it’s imperative to provide the readers with all the options, information, and tools possible so that they can make the right decision based on their own personal financial position. I think a lot of times people can get themselves into these sticky financial situations by being undereducated and misinformed about what options are available to them.

Time-barred debt, debt settlement and bankruptcy are all options that can be considered depending on your financial situation but you will need to take a very close look at your finances and you may be required to seek a professional in order to choose one of these options.  With time-barred debt, you need to consult an attorney before taking any action, but yes, I do believe that you’re entitled to use your legal rights in that regard to get out of debt and get back on your feet financially. Time barred debt is basically the equivalent of the statute of limitations in regards to your finances and debts.

As for debt settlement you can usually use the rule of thumb – if it sounds too good to be true—it probably is too good to be true.  I would never let anyone I love go that route– but there are a few narrow circumstances where it might make sense, which I detail in Debt Free For Life – if you are thinking about a debt settlement company make sure you check all your options and check them out with the Better Business Bureau.

Finally, there is Bankruptcy. Bankruptcies reached 1.5 million in 2010, the highest in five years.  With so many people who are drowning in debt and turning to bankruptcy I thought it was necessary to include a chapter explaining how it works, when to use it and how long it will take to recover. When it comes to bankruptcy, I always stress that you get professional financial and legal advice first, and to think of it as a temporary solution to a temporary problem – it doesn’t excuse you from making real changes in your life so you’re never in that situation again. But you need to know that filing bankruptcy is also not the end of your financial life. Let me stress—if you think that bankruptcy may be in your near future make sure that you don’t wait too long – act now and read Debt Free For Life!

BB: What further advice, that isn’t included in the book, would you give to a reader about to read the book?

David:

I would say if you are serious about getting out of debt and staying out of debt you should build a support team of your friends and family. Have them know what you are doing, see if they will join you in your pledge to a debt free life and use them as a support system. One of my favorite success stories is of a woman by the name of Genevieve – who has a “DOLP Team” at work that keep each other on track during their journey toward financial freedom – they pick each other up when they fall down, they work together and share their progress.

To provide further support for people on their journey toward financial freedom I encourage anyone in debt to join my Debt Free Challenge at debtfreechallenge.com. Challenge participants will be automatically entered to win $10,000 toward paying off their debts. Joining the challenge will help you commit to a debt-free life and stay motivated with free information and a community of support from others pledging to pay off their debts. Finally, you can join my Facebook community at www.facebook.com/davidbach – here you can share your accomplishments, ask questions, and speak to like minded individuals.

BB: What do you feel is the current state of personal finance?  (By that I mean, do you feel that people as a whole are moving in the right direction when it comes to their finances, or are we still stuck in a bit of a quagmire?)

David:

The truth is millions of Americans are buried in debt and want out! There is a movement in this country right now to pay down debt and save money. Savings rates are up to 6%, the highest in two decades, and debt levels are falling. One credit bureau estimates that more than 45 million people (or roughly one out of every five Americans with a credit score) want to improve their financial well being through debt reduction. Furthermore, according to creditcards.com almost $200 billion of credit card debt was paid off last year – so I think that people are starting to see the light about getting their personal finances under control – starting with paying off their debt.

People are ready to take action—smart action—that will help you become financially free and secure. And this is why I have written Debt Free For Life to give people new ideas and tools to help them be smarter about their money and their debt. The best system I’ve found for that is Debt Wise, which is an online tool that automatically pulls debt information from your Equifax credit report and uses it to create a priority debt payment plan while simultaneously tracking your progress towards debt freedom.  This online program basically does what I have taught for years as the “DOLP method” and does it automatically for you.  To get you started Equifax is offering a FREE trial of Debt Wise that so you can see how it will save you time and money while helping you pay down your debt.

I think that people have a lot of good intentions when it comes to their personal finances, but they still struggle with debt and don’t know how to start tackling it. Equifax, just released a report listing the top metro areas in the country hardest hit by credit card debt, and in many places, the percent of household income going to credit cards is more than 15 percent – and that doesn’t include car payments, mortgage payments, etc.  People are getting tired of the routine of going work, making money, spending money, going to work, making money, spending money. It’s time to free yourself from this vicious cycle by taking control of your finances.  I would encourage people to take a good, honest look at what their share of debt is and then make a plan of action for paying that debt down.

BB: Finally, what advice would you give to personal finance bloggers like myself?
David:

Be an advocate for your readers – they look to you for financial advice, so treat them as you would your best friend when dispensing advice. Act with integrity and don’t hesitate to tell the truth about personal finance topics, even ones that seem controversial. And always be responsible in how you present different subjects, being sure to fact-check and look at both sides of the issue first, but have an opinion. The more you care about your readers the more they will care about what you write and share.

I also just want to say thank you for taking the time to my book read and ask me these questions.  I really appreciate the support and the opportunity to help inform your readers!

My thanks to David for taking the time out of his very busy schedule to answer my questions. Again, I’ve got a review of the “Debt Free For Life” book coming up on Yakezie.com.  (I’ll link it when it goes live!) If you’d like to give the Equifax Debt Wise system a try (I’ll have a review coming up) I was able to secure a free trial for my readers.  If you go to http://www.debtwise.com/beatingbroke, you can sign up and give it a spin for free.  At the end of the free trial, you will be charged, so make sure that you cancel before the free trial expires!

Ask for the Special

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I’m not a very outgoing person.  I have a hard time going up to people I’ve never met.  I have a hard time even talking to people I’ve never met.  So, I have a very hard time following the old advice that you have to ask for the real discount.  Luckily, not everything has to be done in person, so I can send emails for some things.  Which is exactly how I proved that old adage true.

For Christmas, instead of receiving gifts from all of our relatives, we asked them to put in the money that they would normally have spent to a mini-vacation fund for us.  We all have set spending limits for our Christmas presents, so it was pretty easy for them to do that.  Then, we took a nice little weekend trip the day after Thanksgiving.

We wanted someplace nice that would be within the budget, but would still count as a vacation.  In other words, Super 8 just wasn’t going to cut it.  We had originally settled on one place, but, being the curious fella that I am, I kept looking for a better deal.  And, as luck would have it I found one.  In fact, for what it would have cost us for one night at the original place, we stayed for two at the next place.  And, if you want my honest opinion, I think the place I found was a lot nicer.  How did we get such a deal?  I asked for it.

Simple really.  I emailed the manager who was listed on the website.  He forwarded my email on to the guy in charge of reservations.  In my email, I simply told him what days we were planning on staying, and asked if there were any specials that would be active for that weekend.  At this point, he could have easily just said no.  But, he didn’t.  And he earned a customer.

IMG_2154The place was very nice. (Here’s a link and a picture of the living room area if you’re curious: Chase on the Lake, I highly recommend it.) They called the room we stayed in a “condotel”.  Basically, it was a two bedroom, two bathroom, suite with a full kitchen and living room.  Everything was way above the typical standards that we have for a hotel room.  Overall, it was incredible.  We spent the whole weekend relaxing (kid-free, thanks to Grandma) and came home refreshed.

We would have gone on the trip in any case.  But, because I asked for the special, it became a lot cheaper than we had planned on it being.  And, if we plan on doing it again (we will), I think we’ve found our place.  Next time you’re making plans for a trip, or just trying to buy something special, make sure you at least ask for a special.  You might just surprise yourself and get one!