Dear Pre-Coronavirus Chloe,
That’s true– you do have credit cards. And you do have high enough limits on them that would allow you to live off your credit cards for 6+ months. In this emergency situation you’ve conjured up in your head, you still have your job and so taking on credit card debt doesn’t seem all that scary because you could pay it off in a reasonable timeframe, possibly even without paying any kind of interest.
But what if you don’t have that cushy job anymore? Will you be able to pay off your credit cards when you have no income?
Probably not. And you know what happens with credit card debt? Well, you get a big fancy 15% APR that will make paying off that credit card debt a BEAST when you do finally get another job.
Which, by the way, can take anywhere from 3-6 months when we aren’t in a coronavirus crisis.
Let’s do the math of using credit cards as emergency funds.
Your essential expenses are about $2,800 a month and your credit card APR is 15%. If you lost your job for three months, you’d acquire $8,400 in debt in that short time frame, and you’d get charged an additional $1,260 in interest alone which would bring your total to $9,660.
But let’s say it took you 6 months to find a job since we’re in the middle of an economic shutdown.
Your credit card debt would then be up to $16,800! At a 15% interest rate, that means you’d be paying $2,520 in interest making your total debt $19,320!
Even if you could throw $1,000 at your bill each month, you would be paying that credit card bill for a whopping 19 months.
So no, dear Pre-Coronavirus Chloe– credit cards are not emergency funds. Credit cards, when not used properly, cause financial emergencies that are incredibly difficult to recover from.
Very good Chloe’. You’re “adulting” is getting better. Love you
Thanks, Grandma! Love you <3
Good one!!
Thanks!
So necessary! I think we’re all on edge right now. Setting a goal to build that emergency fund can definitely be a needed distraction.
100%!
Great advice! An emergency fund is really so important to financial stability and well-being.
Totally agree!