Last week we began our January 2022 Money Monday, with the first of a series on fundamentals- credit score. While all aspects were not addressed you should be aware that mortgage payments and car loan payments if not paid when due, can result in the lowering of your credit score by 100 points! If we had time, or rather space, I would share that story with you. That said, this week I want to focus on another fundamental called emergency fund. Not do you have an emergency fund, but instead, the nuances or decisional processes of establishing an emergency fund.
For example, what are some of the factors to consider when establishing an emergency fund, or in which vehicle or option should I retain my emergency fund? Let’s dive into this emergency fund thing!
Do you need an emergency fund?
There are all kinds of theories among financial advisers, experts and hustlers as to whether you need an emergency fund. Among the two most popular are yes you need an emergency fund so that when things go wrong you have a resource from which you can draw upon in a crisis. The other theory is that you don’t need an emergency fund because you can use your credit card to address any crisis when it arises. In other words, your credit card is your emer-
gency fund. They argue, you can use your credit card and pay it off when the crisis is over just like you would replenish your savings or other vehicle if you were holding your money in an emergency fund account. They further contend that holding your money in some account making minimal interest is not worth it while the outstanding balance on your credit card remains zero.
Well, I don’t buy what they are selling that your credit card is your emergency fund. But some of you may see it differently and if want to engage in further discussion, sign up to join the Money Monday conversation on January 31, 2022 on Zoom. For me, not having an emergency fund and relying totally on my credit card as my first option in a crisis is – “ irrational optimism”!
First Critical Factor:
In deciding to establish an emergency fund, should you get hung-up with the rate of interest earned on your account? It’s an emergency fund- meaning funds you need when an emergency occurs. It’s not or should not be your investment account. Let me suggest that the main factor should be access! How soon can I have access to my money when a crisis arrises and I need it immediately. Sure, everyone would like to earn interest on their emergency fund, but would you prioritize that over access? Further, if you’re that concerned about earning interest, you do not have to retain all your emergency funds in the same account. Let’s rethink your emergency fund priorities.
Critical Factor Two:
Where should you retain your emergency fund? The answer to that question depends on many factors, but mostly your risk tolerance. What I can share are some of the possible options available. Starting with your traditional saving and checking account, the best thing they have going is that your funds are insured by the FDIC for up to $250,000.00. That’s safety! Next up might be Certificate of Deposits (CD). One issue with CD’s is that you may pay a penalty for early withdrawal. That’s the risk. You never know when an emergency will occur. Further, you could consider Money Market Funds. The downside with Money Market Funds is that the assets are not FDIC Insured. These are popular despite that risk. Can you handle that? The truth is they all have their positives and negatives, so, you just have to conduct some research and choose which one you could live with. The ones referenced above are just a sample of some emergency fund options. However, there are many others such as, non-traditional but online banks, money market deposit accounts and mutual funds to name a few. Who said getting your finances in order or rebuilding them was easy? But ask yourself, are you going to be a good steward and build on sand or rock? Which one will be of more assistance to you when the next recession, lost job, illness, family tragedy or pandemic comes?
This is What’s Up!
Today’s what’s up is about closed credit cards. If your credit card is closed, it will affect your credit score because it means that you have less credit available impacting your credit utilization rate. The credit card issuer is not going to tell you that they are going to close your account because of non or lack of usage. But be informed, that there are some credit monitoring services who would send you an alert about your account being closed before it happens. Don’t ignore the alert.
Also, if you are alerted or the account is closed, ask for it to be reopened, bearing in mind that they may do so at a different interest rate. But the truth is that, they do not want to lose a person with good credit. If the card if reopened and your credit limit is lower, not to worry. After six months or more, you can ask for an increase and it will most likely be granted. And that’s what’s