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Money surprises aren't good!!!


An article yesterday on the motleyfool website asked the question; is a credit card a good alternative to an emergency fund?

It got me thinking. An emergency fund of at least $1000 dollars, as suggested initially in the article, is a great idea. I'd suggest save an initial $1000, then go on to save enough to replace a hot water service, cover an urgent medical need or other unexpected expense.

The article's point is a discussion (and advertisement for credit cards...) about whether actual cash; ie the cold hard stuff locked away somewhere or a credit card is a better option.

In my world, it depends on what you're trying to do re loans. If you're interested in refinancing or looking toward a new loan for an investment property, banks count the whole potential draw down of a credit card as a liability. This means that if you have a credit card with a limit of $5000 and even if you pay it off every month; the bank will add $5000 to any other debt you have. This may mean that you are not in as good a position as you might think and I suggest aiming for all the wriggle room you can get when it comes to servicing a loan.

My thought is that everyone should have an emergency fund for all the unexpected situations that pop up and cash does has some great benefits as it kind of hurts to spend what you've worked so hard for but it can be challenging to keep it away. A good tip is to give it someone that you trust for a true emergency. It also helps if you can define what a true emergency is!!!

A credit card can be a good back up to but it's best if you only have a limit that you truly need and pay it off each month, especially you are in discussions with a lender. Of course the more money that you can pay down on your current loan to increase your equity position will make it easier to refinance or secure a new loan.

The article says it might be a good idea to save an emergency fund of 3 months living expenses to cushion yourself against significant interruptions to your income and that's a great idea too. If you'd like to work out your living expenses, either for a month or 3, download our free Budget Tracker. See above More/Resources.

I do love a good savings plan!

Article here.

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