Ok hopefully this does not come off as preachy. This post is mainly for some of the newer members on the board. I’ve read a few posts on the forum recently (and a couple of other places) about people wanting to build up their credit limits up for the purpose of serving as an “emergency fund”/ “insurance”. They are a lot of great reasons to go for large CLI’s…but I would respectfully submit that using your credit cards as insurance for financial hardship is NOT a good idea.
I know this is a credit forum so we understandably focus on obtaining/maintaining good credit. But it is equally important to save money for the future (this will also indirectly help your credit) as well as save for unanticipated events. Most financial experts recommend having at least three separate savings accounts:
- General Savings (to save up for a mortgage, car, vacations, etc.)
- Long Term/Retirement Savings (IRA, 401K, etc.)
- “Rainy Day” Fund containing 3-6 months of salary (only to be used in extreme emergencies such as layoff, medical/family emergency, etc.)
I can speak from personal experience that not having a rainy day fund sucks. Back in 2009, I was already on thin ice with my credit and was basically living check to check…and ended up being laid off for 3 months. Even though this was a relatively short period of time, it sent me on a financial/credit death spiral that has taken me almost 5 years to recover.
So as important as it is to build great credit, please do not forget to put money away for the three purposes stated above. Even for college kids, putting small amounts put away consistently can make a BIG difference down the road. I started my rainy day fund by putting in only $50/month. Now I’ve got a solid 4 months gross salary in there, and hoping to have 6 months by the end of the year.
OK I’m off the soap box now…lol.
@PlasticOrPlastic wrote:I agree and disagree with this. Obviously I would never use credit cards as an emergency fund for other credit card debt, but with your savings example above $50 a month for a year gives me $600 hardly an emergency fund. While I do agree with saving even a small amount regularly, things happen that may need quick access to cash. So in that first year you have $600 saved up and then your transmission goes out. Do you wait 4 years to replace it while you save up? I guess it depends on what kind of emergency you're talking about, but I have both a savings account, as well as 20k + in available credit incase something pops up that needs my attention asap.
Hi Plastic-
I probably should have phrased it a little better. I started the account by putting $50/month (all I could afford at the time), but eventually was able to put money away in much larger increments. Obviously $50/month is not much to lean on, but we all have to start somewhere.
Like you, I agree that stuff happens where you may have to use some of your credit in an emergency. If the choice is using your cards to ensure your kids have food/shelter, the choice is obvious. My only point was to not ignore savings as it is equally important to credit in our overall financial 'health'. You cannot have one without the other. It's like working out at the gym for two hours and then going to McDonald's and having two Big Macs and a large fries...lol.
Plus we are all one credit analyst's mouse click away from a CLD, so counting on a credit for emergencies is always a dicey proposition.
@Dw4250 wrote:Ok hopefully this does not come off as preachy. This post is mainly for some of the newer members on the board. I’ve read a few posts on the forum recently (and a couple of other places) about people wanting to build up their credit limits up for the purpose of serving as an “emergency fund”/ “insurance”. They are a lot of great reasons to go for large CLI’s…but I would respectfully submit that using your credit cards as insurance for financial hardship is NOT a good idea.
I know this is a credit forum so we understandably focus on obtaining/maintaining good credit. But it is equally important to save money for the future (this will also indirectly help your credit) as well as save for unanticipated events. Most financial experts recommend having at least three separate savings accounts:
- General Savings (to save up for a mortgage, car, vacations, etc.)
- Long Term/Retirement Savings (IRA, 401K, etc.)
- “Rainy Day” Fund containing 3-6 months of salary (only to be used in extreme emergencies such as layoff, medical/family emergency, etc.)
I can speak from personal experience that not having a rainy day fund sucks. Back in 2009, I was already on thin ice with my credit and was basically living check to check…and ended up being laid off for 3 months. Even though this was a relatively short period of time, it sent me on a financial/credit death spiral that has taken me almost 5 years to recover.
So as important as it is to build great credit, please do not forget to put money away for the three purposes stated above. Even for college kids, putting small amounts put away consistently can make a BIG difference down the road. I started my rainy day fund by putting in only $50/month. Now I’ve got a solid 4 months gross salary in there, and hoping to have 6 months by the end of the year.
OK I’m off the soap box now…lol.
This is great advice. Something similar happened to me, so I'll add one suggestion:
If you're young, don't live AT or ABOVE your means. Live well below them as long as you can do so comfortably. Credit can be a companion in that task, and part of a backup plan, but it should not be THE backup plan.
Right out of law school, I had a great-paying legal job, and went in for the fancy apartment and all that. It was fun, but when my firm laid off, like, everyone, for no reason, it meant my $20,000 in savings were not adequate to the task of protecting me through prolonged unemployment. Given my rent & salary, I should have saved more, or had a less expensive monthly costs to start with.
That was three years ago, and after two and a half years of a great but not-great-paying job, I'm still recovering from the fallout. The silver lining is I'm now conscious of the role credit can play in my financial present & future.
Gardening since May 2015
Talking slightly different things I suspect. Historically (haven't been on the CC board frequently in the past long while) when I've talked about building limits for financial defensibility, it's because there's things which credit cards can be used for, and things where they can't.
To give an example: I'm currently chasing a startup with zero in revenue and therefore zero in income to me personally. While I have non-trivial cash reserves and near-cash holdings, at some point I'm going to start running low. Somewhere along that curve depending how things are going, I may stop PIFing my cards, and start floating balances on a couple (with favorable APR's), as I can pay my rent with cash, but not with a credit card.
In a different situation, if I were truly unemployed, and I was searching for a job but had limited cash resources, by the same token I'd be using the cards as short term float and hording my cash for things I couldn't use credit for.
I've never pontificated that people should expect to skip typical savings (retirement, children's college tuition, etc) in figuring that credit limits could cover that, but having credit as another method to keep life going in this market economy is a smart decision for anyone.
End of the day, I'd rather be paying 20% on balances with a roof over my head, than being homeless and begging for a hamburger outside the drive through if it comes to that at some point: if I can push that second one out by six months, that's a long time for me to scrape together another source of income, or pack up and move back with my dad worst case... neither of which might be ideal, but having reasonable limits allows me to take that short-term debt on if there's something more important (however it's defined) in life.
Honestly, that's what they were designed for anyway: short term float for things you couldn't or didn't want to write a check for.
@wa3more wrote:
Second friend took $20 million from his portion of sale of family business and started making bad decisions. Opened some restuarants that failed, bought expensive real estate, mutiple houses. Then his wife wants a divorce and he is strapped for cash. Now he is selling and taking big losses while his ex-wife picks the last meat off his bones.
Count on stuff happening. It will. My two friends didn't think it could.
Ouch...that really sucks for your friend. I never understand stories like this. Even if you have a trained chimp as a financial planner who deals in safe mutual funds, bonds, etc, they should be able to get you an annual rate of return of 3-5%. If you're scoring at home, for someone with $20M to invest, that's $600K- $1M/year (less 20% capital gains tax) for basically sitting on your butt doing nothing at all.
With a competent financial planner and in today's stock market, you should be able to net considerably more. Not as sexy as opening a restaurant, but in the end probably a better plan especially if you don't know what you are doing. Like I said...ouch.
And oh yeah to quote Chris Rock: "EVERYBODY needs a pre-nup!!!"