I used to look at credit cards as our emergency fund, but now I know they would fail us if our finances truly crumble. According to a recent article by The New York Times, more than a fourth of Americans have no emergency savings. I can relate because it seems virtually impossible to build and then maintain an emergency fund. When it comes to minor financial emergencies, I view my credit cards as a backup when our savings is low. Even though we nearly depleted our liquid savings recently, I know I have to work even harder to restore our emergency savings in case of a job loss or major illness.
Spending what's been saved
The No. 1 reason it's so difficult to build up an emergency fund is because stuff happens. We recently had to pay $1,000 to have our air-conditioning unit repaired. Living in Florida in the summertime, it wasn't a debate about whether or not it was a legitimate emergency. We also had to pay for unexpected medical bills and unanticipated college fees such as dorm cleaning fees.
Paying one way or another
Whether we pay for our "emergencies" with a credit card or take the money out of savings, we are still spending the money. In most cases, we can cover the credit card bill within the billing cycle. Every time we have to pay a high credit card balance due to a legitimate financial emergency, I have to put other financial goals on the backburner. My first line of defense is to only pay the minimum owed on our mortgage. The next step is to temporarily suspend my retirement savings. I rather take a break from the big goals than live in misery by denying myself the day-to-day pleasures.
Saving extra when we can
Even though I'm frustrated about the extra bills this past year, I know I could be in a worse predicament. My plan is to always save extra money when times are good so I will have at least some cash in an emergency savings account when we hit a financial rough patch.
Being forced to sell our home
If we lost our jobs, we would most likely be forced to sell our home without adequate money in savings. Fortunately, we could use the equity to help us pay for an apartment while we searched for jobs. According to the New York Times, half of Americans have less than three months of expenses saved up. I've always thought of my emergency fund as a place to get money to pay for unexpected bills such as broken appliances and medical bills. We wouldn't be able to use our credit card to pay our mortgage if we lost our jobs so we'd put the house on the market.
I'd be willing to sell my home in cases of a job loss. At the same time, I won't do anything drastic to pay for less dire problems such as broken appliances. I won't sell my home, take out a home equity line of credit, borrow money from relatives or sell family heirlooms in order to pay for surprise bills. I'd just pull out my credit card and vow to save more when I can. Credit cards can't save me during a financial apocalypse, but they come in handy when it's been a really bad day.
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