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3 Months Salary

Contributor

3 Months Salary

I have been trying to balance the old wisdom of "have 3 months in savings for emergencies" with "pay off your CCs because APR means saving accounts are negative assets".

 

I had never considered before joining this forum that some people can have CLs higher than their salary.  If someone's available credit is higher than what they would earn in 3 months, is there any reason to keep more than a minimal amount of cash for emergencies, before CC debt is paid down? Especially if a low utilization rate would allow for even more emergency money after a CLI.

 

Cheers,

 

Kree

Message 1 of 32
31 REPLIES
Valued Contributor

Re: 3 Months Salary

Credit cards for emergencies are horrible ideas.  That's why many go BK.

 

Personally I'm invested in banks and love cashback rewards and the only way to fund those is to have people use CCs irresponsibly.  So I am gleeful at others paying interest...serves my interests.

 

I have 18 months of emergency savings now and it's a HUGE anxiety relief.  I created a thread for this topic here:  http://ficoforums.myfico.com/t5/Personal-Finance/The-Savings-Playground-for-June-2017-summer-break/t...

 

Paying interest is less stressful once you have many months (or a year) of emergency savings.

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Message 2 of 32
Established Contributor

Re: 3 Months Salary

I definitely echo what ABCD said. Using savings to pay down CCs to get bigger CLIs to use in case of emergencies is definitely putting the cart before the horse. Once that cushion is there, you can use the CCs even for emergencies and no matter what you'll be able to cover them using your rainy day fund. That is what it is there for anyway. 

I'm not preaching but I'm working on my own fund while still trying to sock away what I can for retirement as well. But I have one months bare expenses in the bank and it makes me nervous as all get out if I have a bad month or if I get laid off. Or more likely scenario i get pissed off and walk lol. I want that freedom to play golf for a few weeks while i'm looking for work. 


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Message 3 of 32
Valued Contributor

Re: 3 Months Salary

If you are young (meaning under 25) find a local FIRE group to join (Financial Independence, Retire Early).  All of the "kids" in my two FIRE groups who retired before age 30 had savings as a priority, not credi limits.

 

The group in the past 5 years went from about 20% retirees under 30 to almost 60%.  It amazes me to see folks that young no longer having to work -- none of them were born into wealth or got lucky with lotteries or anything.  Just diligent work and diligent SAVINGS.  Few of them have huge credit limits, too.

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Message 4 of 32
Established Contributor

Re: 3 Months Salary

I purposely ran up a $10k CC balance in order to sock equally as much away in emergency savings.  I BT'd the $10k to 0% for 12 months. I pay $350 every two weeks on the $10k which will have it about done by the time the 0% is up. Continuing to save $250 every two weeks with an additional 9% going to my 401k.  

 

 

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Message 5 of 32
Contributor

Re: 3 Months Salary

But the math, good sirs, the math.

 

Lets say I save 100 dollars a month to build my emergency fund. After 5 years I would have 6000 monies.

 

If instead I paid off an additional 100 dollars of CC debt each month. After 5 years, at 23apr, I would have 11000 monies available in credit.  Nearly twice the emergency fund, for the same monthly expenditure.  Plus the improved credit score would allow for lowered aprs,  which would save even more on additional debt.

 

Alternatively, Let us say that someone already had 6000 in savings. If they used it to pay down their CC debt, they would still have 6000 available for emergencies, but over the course of 5 years they would save 9000 in interest.    Giving a growth of 22%.

 

Now I understand that pure credit is a bad idea for emergencies, minimums must be paid, but I do not see why a larger savings would be beneficial while debt already looms.

 

Cheers,

 

Kree

Message 6 of 32
Valued Contributor

Re: 3 Months Salary

Your math is ignoring one huge area of finance: personal stress and anxiety towards having huge debts and no way to pay them off AND then having to wonder how you would handle injury or unemployment.

 

Having $6000 in the bank in cash means you might have to pay $10,000 in interest and principal, yes.  But it also means you can give the middle finger to your boss today.  Or tell the roommate you hate that you're booting them and will carry rent yourself.

 

Having cash in the bank means you are free to do things that people with no cash in the bank can't do.  You can't put a price on that in your math, can you?

 

Not having anxiety about unemployment also is something you can't put a price on.


The math doesn't work here because the people teaching you that bad math are in debt to their eyeballs or they make a commission on giving you bad advice.

 

What's better: spending $500 on video games this year or investing $500 only to have it lose 10% value?  The latter is better even though you only have $450 left.

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Message 7 of 32
Established Contributor

Re: 3 Months Salary


Kree wrote:

But the math, good sirs, the math.

 

Lets say I save 100 dollars a month to build my emergency fund. After 5 years I would have 6000 monies.

 

If instead I paid off an additional 100 dollars of CC debt each month. After 5 years, at 23apr, I would have 11000 monies available in credit.  Nearly twice the emergency fund, for the same monthly expenditure.  Plus the improved credit score would allow for lowered aprs,  which would save even more on additional debt.

 

Alternatively, Let us say that someone already had 6000 in savings. If they used it to pay down their CC debt, they would still have 6000 available for emergencies, but over the course of 5 years they would save 9000 in interest.    Giving a growth of 22%.

 

Now I understand that pure credit is a bad idea for emergencies, minimums must be paid, but I do not see why a larger savings would be beneficial while debt already looms.

 

Cheers,

 

Kree


$$ available in credit is not an emergency fund, though. You're placing your ability to get through an emergency in the hands of your creditor who can REVOKE that credit at any time.

 

Cash in the bank pays for anything you need it to whenever you might need it.

 

 

 

 

Ch 7 Discharge May 2015: EQ 588/TU 552/EX 570
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Message 8 of 32
Established Contributor

Re: 3 Months Salary


Kree wrote:

I have been trying to balance the old wisdom of "have 3 months in savings for emergencies" with "pay off your CCs because APR means saving accounts are negative assets".

 

I had never considered before joining this forum that some people can have CLs higher than their salary.  If someone's available credit is higher than what they would earn in 3 months, is there any reason to keep more than a minimal amount of cash for emergencies, before CC debt is paid down? Especially if a low utilization rate would allow for even more emergency money after a CLI.

 

Cheers,

 

Kree


Credit cards are not money. Credit cards are not spending power. Credit cards are not an extension of your assets. All credit cards should be seen as is a means by which you can spend your already acquired assets/wealth. That is to say, if you cannot buy something right now with cash, you should not buy it right now with a credit card.

 

When it comes to paying down CC debt, you do need to do a bit of juggling as you are now factoring the value in having a safety net with the significant cost of carrying debt. My advice in this situation is conditional:

 

- If you are not confident that your current financial situation will remain stable for the next 6 months, don't touch your emergency savings. This means if you think the likelihood of your needing it is more than about 5%, leave it be. It's far better to deplete savings to get through a tough spell than to take out 20% loans (which is what CCs basically are) to get through a tough spell. Keep paying down your debt as you are currently.

 

- If you are highly confident your current financial situation will not change for the worse for the next 6 months, dip into your emergency savings by up to whatever you can replace in 6 months and make some large CC payments today. The reduction in balance will immediately reduce your monthly interest paid and make future payments go a little further toward paying them down. At the same time, slowly replace what you spent from your emergency fund over that time. Once replenished, rinse and repeat if necessary.

 

Do not deplete your savings to the point that a minor to moderate emergency (car repair, emergency room) will force you to put some or all of that emergency on a card. This is because of what I said at the top - never, ever use credit cards to pay for something you can't afford to buy with cash. Once you start needing credit cards to get through the month, you're in danger. It's very difficult to get back from that point without a major change to your financial situation, and unfortunately that major change is often of a bad form, such as bankruptcy.

Message 9 of 32
Contributor

Re: 3 Months Salary


SteelerNYC wrote:

 

$$ available in credit is not an emergency fund, though. You're placing your ability to get through an emergency in the hands of your creditor who can REVOKE that credit at any time.

Cash in the bank pays for anything you need it to whenever you might need it.


Now here is an important point of view. The revoking of credit. I had not considered this aspect. I've only ever seen credit lines decrease when people are chronically delinquent on payments.  Now I must look at fine print, to see if random decreases are allowed.  Probably yes, but under what circumstances, how much, and how often.

 

Cheers,

 

 

Message 10 of 32