Question…Why would you keep $1,000 in a low-earning savings or checking account when you owe $2,000 on a credit card with a double-digit percentage interest rate? Is this a wise decision or just plain foolish? Look at all the money you could save in interest and fees if you paid down that credit card. On the other hand, how does it feel to have no cash on hand? Is there a right or wrong answer here?
What happens if you or someone in your family gets sick, loses a job or heaven forbid the refrigerator dies? Do you have cash on hand to help out until things get resolved or will you run around the house screaming that the earth is coming to an end and there is no way out but to call your Uncle George (the rich one in the family) and grovel at his feet for a few dollars to get by?
Research suggests that keeping a cash buffer greatly reduces the risk that you will miss a payment for rent, mortgage or a recurring bill, will be able to afford to buy food or be forced to skip needed medical care. Many families struggle to make ends meet. A Federal Reserve survey estimated that almost half of U.S. households could not easily handle an emergency expense of just $400.
As we all know, all households are subject to expense shocks that cannot always be put on credit. Rent payments, for example, typically cannot be put on your credit card. Sixty-seven percent of households own at least one credit card but using them are not a good means to the end. Fifty percent of these households report being more than 30 days late on their payments, with a mean balance of $3,990, and 17 percent reported a declined card transaction in the last six months. At this point, borrowing money doesn’t seem very likely as well.
Thus, we come back to the question…pay down high interest debt or cash on hand? It is my personal opinion and that of a recent Federal Reserve survey that households should maintain an emergency savings even if you do incur extra debt by not paying down that credit card. Cash on hand is that buffer that can be drawn down when your household is confronted with those financial shocks.
So start that savings account or find a pretty, blue mason jar and start stashing $10 or $20 away for those emergencies. Years ago I noticed that every time I got paid, I would waste a few dollars on rewarding myself for working so hard. I deserved it, I wasted it! So I started a savings account and now stash those few dollars every payday in the savings account. As I watched that emergency balance grow, I found a new reward. It has come in handy multiple times over the years. You just never know when those expense shocks will hit.
Oh, and one more small tidbit of advice. Never ever talk about having a few extra dollars around any of your appliances or vehicles! They have ears, talk among themselves and take turns breaking down when they think you are getting ahead. Remember, they are always listening and waiting for their next opportunity to relieve you of your savings!