Myths vs. Truths
– Exposing the false beliefs of the financial world
Myth: It’s smart to keep at least one credit card for emergencies.
Truth: An emergency is NOT a good time to borrow more money. Using a credit card for emergencies will only get you deeper in debt.
The absolute WORST time to use a credit card is when you don’t have enough money to pay it off. And when do we find ourselves short of money to pay off the credit card purchase? When we have an emergency! The logic behind this myth is completely backwards.
So the obvious question is how do you handle an emergency without a credit card? Well it may sound incredibly simple but the answer is in building up a savings account designated specifically for emergencies. Of course, it starts with spending less than you make and paying off debt but when you live by those principles every day it becomes a little easier to save up money. And when you have money in the bank for emergencies, suddenly emergencies aren’t quite so urgent.
The temptation with a credit card is to charge the emergency expense to the credit card with the plan of “we’ll figure out how to pay for this later.” It’s so easy to rack up tons of extra debt when your plan is to just figure it out later. Psychologically we convince ourselves that we have an endless supply of money on the card and we really don’t need to be careful about how much we spend. It’s a little mind trick we play with ourselves to make us feel better about spending out of control, but the end result is still out of control spending and extra debt.
On the other hand, when you have money in the bank your plan becomes carefully scrutinizing each expense and watching your other “normal” expenses as well. You watch every dollar more closely because you know it’s a finite resource. When you have 3-6 months of expenses saved up in the bank and designated only for emergencies, you’re self-insured against a short term emergency. If When the transmission breaks, you simply fix the transmission and pay cash for it. If When the water heater breaks you simply replace the water heater.
The best method for preventing emergencies is to be prepared for them. Get in the habit of living on less than you make and create a good spending plan every month. Get your emergency fund in place and don’t touch it unless you have a true emergency. When you develop a lifestyle of not relying on debt for every expense, you position yourself to be much more successful in the long term. You can avoid debt at the times when more debt is the last thing you need. While everyone else is going deeper into debt, you can avoid that trap and be ready to build wealth when the emergency passes.Matt Wegner is a personal finance, small business and leadership coach focused on teaching his clients the tools for L.I.F.E. (Living In Financial Excellence). Learn how to save money for emergencies at financialexcellence.net!