The Folly of Using Credit as an Emergency Fund
Well, you can probably guess from the title of this post my feelings of using credit lines as a source of emergency funds. What you don’t know is that I am speaking from personal experience. My thinking was that it was foolish to set aside a lot of money in an emergency fund that wasn’t earning a lot of interest. Instead, I could put some of that money to use paying down some credit lines and be able to tap that money when necessary making a little extra interest on the spread.
This turned out to be a pretty decent strategy until Lehman Brothers. Needless to say, I got caught in a once-in-a-lifetime event that took even the best of plans and turned it upside down. The credit lines that I used to massage my cash flow were frozen and actually decreased. One of the companies for a business account actually stopped making loans and seem to have gotten out of the small business lending operation all together.
The good thing is that I learned a valuable lesson that I can teach my children or share with anyone else who might listen. I am also young enough that I will be able to bounce back and still do OK in the long run. I do have a positive net worth, but simply am less liquid than I need to be.
Now that I will be paying attention to cash flow each month, I want to develop an emergency fund and am willing to settle for a very low interest rate in savings even if I am losing to inflation. This way I won’t have to depend upon credit or the banks since my assessment at this stage in my life is that banks are not to be trusted. Despite being a good customer, they will serve only their own interests and screw you every time. Just look at the robosigners to see how they operate.
I am thankful that I was able to learn something from the financial crisis and plan on coming away as a better person and better manager of my money.
Did you learn anything big from the financial crisis? Please share.