Having a credit card to fall back on can dissuade you from building a proper emergency fund. I think this happens for a couple reasons. First, with credit you already have a safety net in place. That’s actually one of the reasons many people get credit cards in the first place. Though this can quickly blow up in your face because you could be taking on debt at the exact time it gets most difficult to pay it back. It amazes me how many people grab their credit cards right after a job loss and began using high interest cash advances for everyday life at the exact worse time to be borrowing money. I think having the cards as a safety net allows people to feel like they’re covered so the urgency to save really isn’t there.

Second, I think another reason people don’t build emergency savings when they use cards is because they’re constantly working to clear the debts. Instead of making savings a priority they make keeping up with the card balances a priority. The more debt they have on their cards the less they have available to save and the more likely they’ll need the cards to cover their butts again and so the cycle continues.  

At some point if you want to go with out credit cards you need to break the cycle of spending instead of saving. I personally stashed away a little dough to use for future “emergencies” then stopped using the cards. Once I stopped using the cards and had some real money in the bank to fall back on all I really had to do was eliminate the balances and at that point I was done with the credit card cycle. I had no use for them anymore. I now have an emergency fund with more money available to me than I ever had available on my credit cards…oh and it’s earning interest too.

The good news is Mark has decided, for the first time ever, to start saving. He’s now quickly building an emergency fund since this’ll be his only safety net going forward. It looks like with a little encouragement and some discipline our buddy Mark won’t be “financially retarded” too much longer…at least that’s the plan.

So what’s your plan for dealing with credit cards, do you want them gone, do you really need them around? Let me know how you feel about this.

I also noticed when something went wrong while I was your broke I didn’t have an emergency…I actually had two emergences. The first was the actual emergency itself and the second was the money emergency that arises from the initial emergency. In the one case of a couple I was counseling a recent accident was further compounded by several hundred dollars in overdraft and late fees that were applied by their bank. The additional expense drug the problems into the subsequent months amd magnifying the financial fun they were having. They actually incurred over $400 in late fees and overdraft fees and if I remember correctly this actually required almost as much money to clean up as the initial emergency required in the first place!

The Emergency fund is really the only way to prevent this from happening without going into some sort of debt. The Emergency fund though can only prevent problems from growing to the extent you actually have enough dough to fight the battle. True in most cases you could go into debt to resolve the problem and that’s what most people do – it seems like an easy enough answer. Since they rarely have access to much real money they pull out the plastic crutch and beg for mercy. This does work but you have now stretched this emergency into the subsequent months, and often times years, until the debt is paid. The big problem with this strategy is that now you have weakened your current financial position and will have to fight that much harder to survive the next emergency. This is especially true if the next emergency arises while you are still trying to pay for the last one(s). So now do you not only owe money (plus interest) but you still don’t have any money, I know this because if you did have any money you would have used it in the first place.

I feel building an emergency fund is crucial to any financial plan. To be honest I think it’s more important than paying your debts off completely. Though I think to build a solid financial foundation you need to do both. It’s also much easier to build your emergency fund once you have freed up the cash you were previously paying towards your debts. If you added up all the money you pay out in credit cards, student loans, and car payments how long would it really take you save up 3-6 months worth of expenses in an account? This was a major motivator for me to pay down my debts, I knew that would allow me to build a bigger financial cushion between me and life and paying away my debts would free up the money to accomplish this relatively quickly. 

The first thing I did to build to save for emergencies was create a place to keep the money I knew if I saved this money in the savings account that was tied to my checking it would wander away from me like Seahawks Super Bowl win never to be seen again! So I took steps to “idiot proof” our savings. This post tells how I worked around the issue of having the money available when needed without using debt 29% Interest? Are you Kidding Me?

Another option is a money market account. These are nice because they usually offer a higher interest rate than a typical bank checking or savings account. Many will also allow you the ability to write checks from these accounts (often 4-6 checks per month are allowed). Personally I liked having a back up debit card in my wallet in case something weird went wrong with our regular checking account and I was stranded without gas somewhere.

My plan is to use both a checking account and a money market fund for our emergency money. I know that sounds a little complicated but it gives me the best of both worlds. We can have immediate access to a couple thousand dollars to get us through a pinch which for us should cover most anything that we have to deal with on the spot (a dead car, an exploding septic tank, etc.). All the while we’re earning interest on the remaining balance. If we need access to more we can write a check or do a quick transfer and have access to more within 24 hours or so.

How much money do you feel you need to have access to sleep well at night? If you already have an Emergency fund in place what type of accounts do you use for its safe keeping?

If you didn’t want to pay 29% why’d you sign the stupid contract then?

Now to my FinancialFreak mind this seemed like a perfectly logical question. If you didn’t want to pay 29% why did you agree to borrow money at 29%? According to this person it wasn’t their fault (can you believe they actually attempted to shift the blame on this one?) Apparently they agreed to a 1.0% interest rate in the beginning. That was all fine and good until a payment was made late and the card company killed her on the rate with no warning. Okay in my opinion that’s not entirely true, they did send a warning, it was in the fine print when she signed up for the stupid deal in the first place. So you’re telling me since the card company raised the rate it was their fault? I’m sure it wasn’t your fault for signing onto a bad deal then not making the required payments so the company adhered to the contract and raised your rate because they think you’re a flake and won’t pay them back in the future?   

When a person signs a contract for a credit card (or anything else for that matter) you agree to the terms of the contract. If you don’t like the terms of the contract then you should probably not sign up.

So that then brought up the question of how one would get by without using credit cards. What do you do if you have an emergency? How do you buy stuff online or travel without a credit card? Actually the answer to this is pretty straight forward. So I told her what I’ve done to avoid needing credit cards.

First I removed all my credit cards from my wallet and cut them up – how are you going to stop using them if you keep using them – seems pretty obvious to me.

Then I worked to pay them all off. Since in my case this took some time to do I proceeded to the next steps while I worked on paying the balance down from buying crap I couldn’t afford to impress people I didn’t even like (that’s with interest added of course!)

Next I opened a second free checking account with another bank that also gave my wife and me a couple debit cards, just like our regular checking account so yes we now had two checking accounts and each carried two debit cards.

The next step was to fund this account. We did this by not spending more than we made for a couple months (I know another tough concept for many to grasp). By doing this for a while we were able to gather up some extra money which we deposited into this second checking account. At the time this was about a $1200 (which is where we tried to keep the balance while we were paying down our debts.)

We called this our emergency fund (well a starter version at least). This was only to be used for an emergency and we BOTH had to agree is was an emergency. Since our marriage was based on trust and shared goals there was no issue with us both having easy access to this money. We trusted each other not to let the other down. Plus if either of us was going to screw this up it was going to be me since I am a spender but I know better than to unleash the wrath of my saver wife….again!      

Now that this was all in place we were left with our “emergency cards” and our normal debit cards. These were not credit cards so we only had access to what we had in the account. True we only had a $1200 safety net between us and the world but that seemed adequate for most issues that may arise. Seriously how often do you spend more than $1200 in one shot? In our case this was not nearly enough to protect us from a job loss or major illness but it covered the occasional car and home repairs that always seem to pop up at the worst possible times. Funny thing was this was ten-times the money than I used to keeping the bank but since it was my only safety net now it scared the pants off of me and motivated me to finish the process.   

Once we climbed out from under or debts we we’re able to quickly increase this fund to several months of living expenses. Now, hopefully, we have the ability to handle much larger emergencies like a really broken car of a really broken job, without going back into debt. I will say we’re still a long way from driving around in a Bentley with $60,000 gold teeth tossing $100 bills out the window…but if we do I can pretty well guarantee we won’t be paying 29% interest to make it happen

Have you ever signed up for stupid deal you had regrets over? Did you learn any lessons?