Credit or Your Emergency Savings?
Jeff Martin is a financial advisor at Cornerstone based in Reno, NV. Jeff has earned the Life and Health Insurance Licensure and has passed the Series 65 examination. He enjoys being able to help clients create customized strategies for their portfolios based on their unique financial goals.
CREDIT OR YOUR EMERGENCY SAVINGS?
A question that I hear regularly is: “should I use my cash, or credit for ‘X,’” and the answer is not always the same. I have said before each situation is about as unique as a fingerprint. What makes sense in one situation, may have no business being in another. This being the case, I will share some pros and cons of each that will hopefully be helpful to you should you find yourself asking the same question.
I would preface that having emergency savings is financial planning 101. If this box is not checked, life will likely quickly remind you of why it is important with an unexpected expense. The primary purpose of an emergency savings is exactly that, having access to funds when something unexpected arises, whether it be new brakes, an A/C unit, or perhaps a break in employment. In many situations, utilization of cash reserves can assist in avoiding having to take on debt that may be difficult and/or expensive to manage in the future. Particularly if an individual’s credit options are only those with high-interest rates applied to them, using cash can be a good way to save money.
Utilizing credit can be a good option, and sometimes a necessary option. If an expense presents itself that would require the entirety of an individual’s savings, it may be worthwhile to consider using credit to some degree, in turn maintaining some liquidity and not eliminating one’s savings entirely. In addition to eliminating one’s savings, credit could be a great tool to avoid higher taxes. If someone needed funds more than their liquid savings and would be forced to pull funds from a taxable account, it would push them into a higher tax bracket (or two), and credit could assist in avoiding this.
One of the benefits of being in a low interest rate environment is “cheap” money. This of course is not always the case with some credit lines that have a high APR’s, but it is not uncommon to find near, or 0% financing options, particularly when promotions are being offered. This is what folks mean when you hear the expression “free money.” Using “someone else’s” money is commonly used to build wealth. I have also touched on this point from a different view in the past: if you expect to earn more than whatever interest is being charged, you are likely better off investing your funds, but if you expect to earn less than the interest being charged, use cash.
I should also add that there can be some perks to taking advantage of credit, whether it be miles, cash rewards, etc. If you are spending money you would be anyway, might as well try to get whatever extra benefits you can from it, right? Pending on where you are in life and your own priorities, proper and prudent use of credit assists in building your credit score, which will provide you with better offerings when it comes to borrowing.
Credit can also be viewed as an additional safety net to some degree. Taking a Home Equity line (HELOC) for example, can be a good tool to have “on ice” to be used if and when needed. This can be helpful to use for larger expenses such as remodels, home improvements, etc. I would not encourage an individual to view credit as a total emergency savings given that if we look to the past, banks can freeze, reduce, or eliminate lines without much or any warning.
I hope that I have shared some thoughts and information what will be helpful to you and your own unique financial fingerprint. Cash or credit? It depends.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.