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Family Budgeting and Finances

Fishking

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So I was talking with my wife, who played an episode from some podcast and they said something that just doesn't make any sense to me.

They say that you're supposed to first build up a nest egg/emergency fund of 2-3 months, in a high yield savings account, and then you pay off high interest credit cards. That doesn't make sense to me. Money is fungible. To me, the "emergency fund" could be either saved up money or a credit card. Now, unless your high yield savings account isn't making you more money than the interest that you're paying on your credit cards, why would you do that over the credit cards?

It should be credit cards first, then the emergency fund, imo. What am I missing?
 
Always pay off a credit card. Never keep a monthly balance. The interest on those is outrageous.

If people find themselves overextended and see a need to borrow, I suggest applying for a personal line of credit. You can usually get those at a fraction of the rate charged by cc companies.

The other option is refi the house, if you have equity in one.
 
Always pay off a credit card. Never keep a monthly balance. The interest on those is outrageous.

If people find themselves overextended and see a need to borrow, I suggest applying for a personal line of credit. You can usually get those at a fraction of the rate charged by cc companies.

Totally agreed. Too many of my clients treated their credit cards as an informal emergency fund. Borrowed money with high interest rates is never to be treated the same as a cash reserve.

The other option is refi the house, if you have equity in one.

I would recommend against pulling equity out of one's own house. The interest rates are presently quite good, but I would recommend against people setting themselves back by turning back the clock on their mortgages. At least for their primary residence.
 
So I was talking with my wife, who played an episode from some podcast and they said something that just doesn't make any sense to me.

They say that you're supposed to first build up a nest egg/emergency fund of 2-3 months, in a high yield savings account, and then you pay off high interest credit cards. That doesn't make sense to me. Money is fungible. To me, the "emergency fund" could be either saved up money or a credit card. Now, unless your high yield savings account isn't making you more money than the interest that you're paying on your credit cards, why would you do that over the credit cards?

It should be credit cards first, then the emergency fund, imo. What am I missing?

Well, because it sets you back. If you live paycheck to paycheck and you have absolutely no savings whatsoever, the moment any kind of disaster strikes you are going to be left hurting. Even if you have credit cards with a total credit limit of $5,000 to $10,000 or more, if you face a disaster and have to charge on your cards, you are going to have to pay that money back with interest. Now you have added more stress onto yourself. And if you live off your credit cards when you are in-between jobs, that is just asking for trouble. If you are unable to catch up and pay, those debts will rack up penalties and interest and will be sold to debt collectors and their attorneys who can sue you and garnish your wages or levy your bank accounts. It is far less onerous to live off your savings for two to three months when disaster strikes than having to sweat and borrow more and more money hoping you will have the ability to pay it back right after the disaster is over.
 
Well, because it sets you back. If you live paycheck to paycheck and you have absolutely no savings whatsoever, the moment any kind of disaster strikes you are going to be left hurting. Even if you have credit cards with a total credit limit of $5,000 to $10,000 or more, if you face a disaster and have to charge on your cards, you are going to have to pay that money back with interest. Now you have added more stress onto yourself. And if you live off your credit cards when you are in-between jobs, that is just asking for trouble. If you are unable to catch up and pay, those debts will rack up penalties and interest and will be sold to debt collectors and their attorneys who can sue you and garnish your wages or levy your bank accounts. It is far less onerous to live off your savings for two to three months when disaster strikes than having to sweat and borrow more and more money hoping you will have the ability to pay it back right after the disaster is over.
Right...but if say, instead of doing the emergency fund, you put all the money that would've put in the fund into the credit card, you're still getting that same money pool, plus you're reducing your monthly interest payment by lowing your credit card balance.
 
I’m guessing it’s more behavioral than logical.

Maybe calling it an “emergency fund” in your mind promotes saving behavior. People who are logical enough to say things like “money is fungible” arent the types that ring up big credit card debt I imagine.
 
Having the three month savings and not paying off credit cards first would hopefully build a pattern of savings rather than using credit cards for everything. Spending less and saving more, after the 2 months of savings is built up the person should have the discipline to pay off the credit card

Build the good habits for a lifetime
 
So I was talking with my wife, who played an episode from some podcast and they said something that just doesn't make any sense to me.

They say that you're supposed to first build up a nest egg/emergency fund of 2-3 months, in a high yield savings account, and then you pay off high interest credit cards. That doesn't make sense to me. Money is fungible. To me, the "emergency fund" could be either saved up money or a credit card. Now, unless your high yield savings account isn't making you more money than the interest that you're paying on your credit cards, why would you do that over the credit cards?

It should be credit cards first, then the emergency fund, imo. What am I missing?
Take Warren Buffet's advice for the "easiest way to financial success" = marry well...
 
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