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.
Lesson Learned
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.
You’re absolutely right!
I generally dislike keeping money in a savings account, because I know that it’s not earning any money. Prior to the Great Recession, I put extra money into mutual funds, fueling my investments all through 2006 and 2007.
Then the recession wiped out half the value. I learned that “risk” is a very real thing!
I still invest, of course, but now I ALSO keep a “short-term” goals fund (for vacations, car repairs, etc.) exactly where it’s supposed to be … in a savings/money market account!
Sounds like we both learned a lesson as a result of the Great Recession. I suspect that many will be influenced over years to come as a consequence.
I have been fortunate and always had a pretty good safety net. My wife and I recently learned how important it was when she was let go from her job (best thing that ever happened to her). We had more than enough to cover her lost income and she was able to take time to look for a job (which she got) that she actually likes going to each day.
Without the emergency fund in place, she might have had to settle for something less desirable.
That is wonderful that it all worked out well for you and that she was able to find an enjoyable new job. Having that liquidity in place allowed for that option of taking the necessary time. You weren’t pressured into making any hasty decisions or adjustments.
The best lesson I learned is be aware and diversify in different types of financial asset, and to not freak out and pull my money out of my investments when they are low. Some of my friends did that and lost almost half of the value in their financial investments.
That is a good lesson to be sure. Again, it is important to remember not to invest that which you can’t afford to lose. If you truly have a long term horizon, you should do just fine. Thanks for your comment.
I am a big believer of having a 3 month EF in cash or cash like items (I bond/EE bonds) but no more than 6 month, in my opinion. An EF should not be for car repair, there should be a separated fund for that, home maintenance again a fund for that. Though I have a small 3 month EF in a true emergency I could pull from more places but for someone who says I have a 6 month EF and yet does not have any other fund any repair during his/her job loss and he/she now has a much small EF. I think being honest with yourself about where that money is going to go is the most important thing.
One of my next steps is to work toward setting aside some monetary cushion. I haven’t thought all that much about the size of the emergency fund. I would probably lean toward having one fund as opposed to several. Of course as you mention, that requires being honest about the intended purpose of those funds.
Hi Cash Flow, I get the idea you may be a bit on the aggressive side.
Personally, I’m happy to have some cash earning zero interest on the sidelines for the peace of mind.
Barb,
I am aggressive and will continue to be even as I age. I am very competitive as well. Despite that, I think it is time to solidify the balance sheet and get a little cash together so as to prepare for the next cycle. I do think I have a few years, maybe even a decade, to prepare.