By BOB CUNNINGHAM
This week’s post is being sent to you via Lake Tahoe, NV, and I gotta tell ya — it’s friggin’ beautiful up here.
But of course, you don’t read this column to hear about my vacation travels, so let me get right to business. I will note, however, that I have intentionally shortened this post in the interest of time (as in, more time for me to play!).
Okay, so did my headline catch your attention?
The idea that having a monetary reserve to cover you in the case of an unexpected significant expense is, on its face, a no-brainer. We don’t want to have to borrow from friends or family, or go on a Top Ramen diet just because the car radiator is leaking and needs to be replaced.
But the notion that the majority of folks should put emergency funds in a savings account, which yields virtually no interest, while maintaining a credit card balance that charges more than 20% APR, strikes me as non-sense. Many of the most prominent minds in the world of personal finance insist that you have at least $1,000 – preferably a lot more – set aside and accessible before you pay off debt, invest for retirement, etc.
Phooey on that. There are more productive ways to accomplish the same thing.
The main concept behind emergency money is that it has to be liquid… but that doesn’t mean it has to be as liquid as bank ATM access. Withdrawing from investment accounts, life insurance cash value, and even tapping a credit card can be utilized smartly to accomplish the same goal – and allow the individual to have his or her money working at full income-producing capacity in the meantime.
For example, if you are currently investing in a Roth IRA, you can withdraw the monies you’ve put in (but not the growth) without penalty. This is, of course, not the ideal scenario for gaining quick funds to pay for an emergency because you want your investment account money to stay put and grow using the magic of compound interest. But the setback is usually temporary if you do need to tap the funds, and the smart money managers account for the scenario of not having an emergency as well as the what-if something bad happens.
The idea that we probably won’t need those funds set aside for an emergency is the basis of my approach.
If you have a permanent life insurance policy – which I will talk about in detail in a future post coming soon – you can withdraw dividends the policy has earned and/or borrow from the policy’s cash value.
In both the above instances, the average time to have your money in hand is about 3-5 business days. So you’re probably thinking that in an emergency, you might have to have the money RIGHT NOW. Then what?
That’s where the credit cards come in. You see, using a credit card to pay for an emergency is only a dubious idea if you’re not prepared to pay off that charge before the end of the grace period. But if you use the card to pay the emergency cost as it happens, then use one of the two above scenarios to pay off the credit card, you’re golden.
Now, I realize that not everyone has money invested in a Roth or has insurance cash value to tap, or wants to bother family with the ultimate taboo question. For some, who truly have no other means to cover a significant unexpected occurrence, it’s a choice between putting some unproductive cash aside or rolling the dice with the knowledge of using a credit card if absolutely necessary and perhaps paying a higher cost in the process.
But people should be aware of all their options, and quite frankly, I’m sick of reading about concepts that are allegedly Finance 101 when, in fact, the logic is potentially faulty.
Understand all the choices and consequences, and then proceed with the best strategy for your particular situation. Don’t get pigeon-holed into following the masses.
As always, thanks for reading.
DISCLAIMER: This post represents the author’s opinions only. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment. Results are never guaranteed. Utilize the information as you see fit, make all money decisions at your own risk.