With the economy the way it has been for the last few years, financial experts everywhere have been voicing the importance of managing your money and having a plan for the unexpected. This is true in good times as well, but when unemployment is at 10% and the consumer market seems stagnant, it has a way of magnifying any problem in a financial plan.
The majority of Americans do not have enough cash available to ride out a three month time period if they suddenly lost their income. At the same time, many Americans would have a hard time coming up with enough money if their car engine blew. When talking to these people, they usually say they can just use their credit cards to get through the rough patch and then start paying them off on the other side.
This brings up a good question that financial experts have discussed for years. “What is the best way to prepare for a financial emergency?”
The two main approaches people take are credit cards and cash savings. Credit cards can be convenient because they are available instantly and can provide a sense of security for the cardholder. They immediately have access to a line of credit and often times they can pull out cash if they really needed to.
On the flip side of the argument is cash savings. While most people would probably prefer to have a large sum of cash available for emergencies, many find it difficult to have the discipline to save the money in the first place.
If you talk to just about any financial planner or counselor they are going to tell you the best way to handle an emergency is with cash. The benefits greatly outweigh those of credit cards and provide a sense of security that even the best cards cannot give. When sitting on a sizeable amount of cash, it truly is easier to sleep at night.
Pay and Forget it – When your car breaks down and requires $2000 in repairs, when paying with cash you can leave the problems at the dealer. You do not have a monthly reminder when the credit card bill comes for the next 6,12 or even 24 months.
Cash Amount Cannot be Arbitrarily Cut – Credit card companies have the ability to at any time reduce your useable credit limit. Unfortunately, this can happen right as you may need funds to cover an emergency. Once your credit line is reduced, your debt to income ratio can rise and make it more difficult to get another credit card for an emergency.
Cash is King – When that same $2000 car repair bill comes, you run a higher chance of getting a discount when paying with cash. The business does not need to pay the credit card processing fee and may be more willing to give you a deal to save you money.
Cash is Certain – Unless there is a major disaster or civil unrest, you can be confident that cash will get you out of most emergencies you will find yourself in financially. With the uncertain climate within the banking industry, you cannot be certain your credit card emergency plan will be around for the long haul.
No Interest – When paying with cash, you know the total is the final amount you will have to pay. Credit cards carry some of the highest interest rates in the consumer lending realm and that $2000 car repair bill can easily be $3000 or more when all is said and done.
There is no question that saving up an emergency fund is the safest and most secure way to handle the unexpected. Most people find the act of saving the money to be the most difficult. Set a goal of 3-6 months of living expenses and start socking away money every month, just like a 401k or other retirement plan. The key is consistency and planning. Keep track of monthly income and expenses and each time there is extra money lying around, add it to the pile. With a little determination and time, anyone can get there.