Credit Card Center Advertiser Disclosure

Reply
Established Member
Posts: 35
Registered: ‎09-25-2017

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

Valued Contributor
Posts: 2,457
Registered: ‎03-28-2017

Re: 3 Months Salary

[ Edited ]

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.

FICO8 3/17 550EX, 570TU, 559EQ
FICO8 10/17 710EX, 693TU, 734EQ -- almost 700 club!
Gardening since Aug 7, 17
Frequent Contributor
Posts: 486
Registered: ‎05-06-2017

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. 

Starting Scores 03/17/2017 EQ 491 TU 495 EX465 Currently 10/14/2017 EQ 569 TU 562 EX 546

$300 Open Sky/ $2K NFCU CashRewards/$5.1K NFCU Flagship Rewards
Valued Contributor
Posts: 2,457
Registered: ‎03-28-2017

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.

FICO8 3/17 550EX, 570TU, 559EQ
FICO8 10/17 710EX, 693TU, 734EQ -- almost 700 club!
Gardening since Aug 7, 17
Established Contributor
Posts: 657
Registered: ‎06-04-2015

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.  

 

 

Ch 7 Discharge May 2015: EQ 588/TU 552/EX 570
Sept 2017: EQ 679/TU 660/EX 668 w/ 24% CC util reporting
Discover/Target/NFCU CLOC/NFCU Cash Rewards/PenFed Power Cash Rewards - $46k total revolving
Established Member
Posts: 35
Registered: ‎09-25-2017
0 Kudos

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

Valued Contributor
Posts: 2,457
Registered: ‎03-28-2017

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.

FICO8 3/17 550EX, 570TU, 559EQ
FICO8 10/17 710EX, 693TU, 734EQ -- almost 700 club!
Gardening since Aug 7, 17
Established Contributor
Posts: 657
Registered: ‎06-04-2015

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
Sept 2017: EQ 679/TU 660/EX 668 w/ 24% CC util reporting
Discover/Target/NFCU CLOC/NFCU Cash Rewards/PenFed Power Cash Rewards - $46k total revolving
Established Contributor
Posts: 576
Registered: ‎07-08-2016

Re: 3 Months Salary

[ Edited ]

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.

Established Member
Posts: 35
Registered: ‎09-25-2017
0 Kudos

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,

 

 

Forums posts are not provided or commissioned by FICO. Forums posts have not been reviewed, approved or otherwise endorsed by FICO. It is not FICO's responsibility to ensure all posts and/or questions are answered.

† Advertiser Disclosure: The listings that appear on myFICO are from companies from which myFICO receives compensation, which may impact how and where products appear on myFICO (including, for example, the order in which they appear). myFICO does not review or include all companies or all available products.
‡ Credit cards for FICO Score ranges: The score ranges are guidelines based on internal myFICO analysis of actual applicant approvals, and having a FICO Score in a particular range does not guarantee you will be approved for credit cards recommended in that range. These ranges were not provided by any card issuer.

* For complete information, see the terms and conditions on the credit card issuer’s website. Once you click apply for this card, you will be directed to the issuer’s website where you may review the terms and conditions of the card before applying. While myFICO always strives to present the most accurate information, we show a summary to help you choose a product, not the full legal terms - and before applying you should understand the full terms of products as stated by the issuer itself.

Copyright ©2001-2015 Fair Isaac Corporation. All rights reserved.   | Terms of Use | Privacy Policy | Sitemap

IMPORTANT INFORMATION: All FICO® Score products made available on myFICO.com include a FICO® Score 8, along with additional FICO® Score versions. Your lender or insurer may use a different FICO® Score than the versions you receive from myFICO, or another type of credit score altogether. Learn more

FICO, myFICO, Score Watch, The score lenders use, and The Score That Matters are trademarks or registered trademarks of Fair Isaac Corporation. Equifax Credit Report is a trademark of Equifax, Inc. and its affiliated companies. Many factors affect your FICO Score and the interest rates you may receive. Fair Isaac is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. Fair Isaac does not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating. FTC's website on credit.