Today is devoted to a holistic review of where your money is and how it’s working for (or against) you, including:
- The importance of having an emergency fund
- Using high-interest savings accounts to make your money work for you
- Using credit cards responsibly and to your advantage
- Accessing additional lines of credit
Welcome to Day 4 of my pandemic-inspired, what-do-I-do-with-my-money Uber Frugal Week series. For more about the series, including an overview of what I’ll cover each day, check this out. I recommend you read the series in order; start with Day 1 here. Read disclaimers about me and the series here.
So far in the series, we’ve covered:
- Categorizing and compiling your expenses
- The relief and forbearance programs available in response to the coronavirus
- How to save money in almost every category of your budget
- And finally, a special Reader Suggestions on how to make extra money working from home during the pandemic
While the Uber Frugal Month is an email program, the Uber Frugal Week will appear right here on the blog in a series of posts. I’ll publish Uber Frugal Week posts as quickly as I can but, in all honesty, I haven’t written all of them yet because pandemic means both of my kids are home all the time and my husband and I are both working from home. I’m writing as fast as I can, I promise!
Advertiser Disclosure: Frugalwoods partners with CardRatings for coverage of credit card products. Frugalwoods and CardRatings may receive a commission from card issuers at no extra cost to you. This post contains affiliate links; here’s a boring (but important) explanation of how Frugalwoods makes money.
Uber Frugal Week: Day 4
1) Emergency Funds: They Are Your Friends
Emergency fund is a fancy term for “money you’ve saved just in case.” For many folks, right now is the just-in-case time. An emergency fund is money you set aside to cover you in the event of, oh, a global pandemic with record levels of unemployment, for example.
- If you’ve lost your job and don’t have an emergency fund, don’t panic–there are relief and forbearance programs you can apply for: see Day 2 for a rundown.
- If you still have a job, now’s the time to build–or enhance–your emergency fund.
An emergency fund is, first and foremost, cash money. Stuff like cars, houses, your grandmother’s china, and jewelry are NOT emergency funds. An emergency fund needs to be actual money so that you can actually spend it in the event of an actual emergency. Here’s why: If you’re standing at the mechanic’s receiving bad news about your carburetor*, you’re not going to be able to pay the bill with your paid-off house.
*I have no idea what that is, but I’m fairly certain it’s a car part that can go bad.
How Big Should An Emergency Fund Be?
This is a matter of personal preference and it depends on your risk tolerance. The generic, general advice is that an emergency fund should be three to six months worth of your living expenses (see Day 1 for how to track and categorize your living expenses). For example, if you spend $4,500 every month, you should target an emergency fund in the range of $13,500 (three months worth) to $27,000 (six month worth). The reason emergency funds are calibrated on living expenses is that if you lose your income, you can use your emergency fund to float you until you get another job.
That being said, three to six months is just a general rule of thumb and you might find you feel more comfortable with nine months or even a year’s worth of living expenses. If you’re panicking that a year is a lot of money to save up–you’re right, it is. However, this segues nicely back to Day 3: How to save more money in (almost) every category of your budget. The less you spend, the less you need to save and the smaller your emergency fund can be.
You can also start with a smaller goal: save up one week, or one month, of your expenses. Anything you can do to put a buffer between yourself and debt is a good start. Don’t worry about hitting the three month or six month total right away–start with what’s actionable for you right now. Add to it as you’re able and be proud of anything you can save, especially in these constrained economic times.
2) High Interest Savings Accounts: An Ideal Spot For An Emergency Fund
Although an emergency fund should be easily-accessible cash, that doesn’t mean you should stash bills under your mattress. It means you should put the money in a checking or savings account, not in an asset that’s hard to liquidate (such as a paid-off house or a 401k). My favorite home for an emergency fund is a high-interest savings account.
A high-interest savings account gives you money for nothing. With these accounts, interest works in YOUR favor (as opposed to the interest rates on debt, which work against you). Having money in a no (or low) interest savings account is a waste of resources–your money is just sitting there doing nothing. Here’s an example:
Let’s say you have $10,000 in a savings account that earns 0% interest. In a year’s time, your $10,000 will still be… $10,000.
Let’s say you instead put that $10,000 into an American Express Personal Savings account that–as of this writing–earns 1.60% in interest. In one year, your $10,000 will increase to $10,161.18. That means you earn $161.18 just by having your money in a high-interest account.
And you didn’t have to do anything other than let your money sit there! I’m a big fan of earning money while doing nothing. Keeping your emergency fund in a high-interest account is the easiest way to make it grow. You can read more about high-interest savings accounts in this post: The Best High Interest Rate Online Savings Accounts.
3) Credit Cards: Make Money When You Spend Money
If you can use a credit card responsibly and pay it off IN FULL every month, it’s a fabulous way to earn rewards, such as cash money. Earning cash back from a credit card is the easiest, least complicated, most slam-dunk methodology for accessing credit card rewards. A “cash back” card means that the credit card company gives you a specified percentage back on all of your purchases. The point of using a cash back credit card is that you’re able to make some money when you buy things you were going to buy anyway.
Here are two cash back cards you might consider. I like these options because neither charges an annual fee and they have pretty high cash back percentages:
Travel rewards are the other major category of credit cards and, while travel might seem like a figment of imagination right now, surely we’ll all travel again one day. For travel rewards, a lot of folks love the Chase Sapphire Preferred.
Some Caveats About Credit Card Usage
A credit card is not a license to spend with wild abandon. It’s an opportunity to carefully leverage your spending and get cash back or travel rewards. The enormous caveat with credit card usage is that you really and truly need to pay your bill IN FULL every single month. Not the minimum due amount, but the whole entire bill because if you don’t pay your full credit card bill every month, the credit card company applies an interest rate to the amount you didn’t pay. And their interest rates aren’t low either.
Here’s a mantra to remember: If I spend $1,000 on a credit card, I will pay the credit card company exactly $1,000. By the way, it’s a complete and total lie that carrying a balance on your credit card helps your credit score–IT DOES NOT. Paying your cards off IN FULL every month and keeping them open for many years, however, does help your credit score.
I have two posts about how to use credit cards responsibly and to your advantage:
- The Best Credit Cards (And Credit Card Rewards)!
- The Frugalwoods Guide to a Simple, Yet Rewarding, Credit Card Experience
4) Applying for a Credit Card to Access Additional Credit
If you haven’t lost your job, you may want to apply for a credit card/other lines of credit now in order to leverage your employment status and credit score. It becomes difficult to access credit when you’re unemployed, so if you’re still employed, you may want to jump on that.
If at all possible, the best options are to:
- Slash your spending and live within (or ideally below) your income.
- If you’ve lost your job, ideally you apply for–and receive–unemployment insurance and you avail yourself of other coronavirus relief programs.
But the best options aren’t always possible. And even if they are, you may want to provide yourself with a buffer and a backstop in the form of additional lines of credit. Having credit available to you could enable you to bridge time before receiving unemployment insurance or could allow you to consolidate other debts to pay them off more easily and a credit card is one way to access credit.
To be crystal clear, I’m not recommending anyone get a credit card in order to go on a wild spending spree to buy things they don’t need. Rather, a credit card can be a form of insurance, though a risky form of insurance since it comes with an interest rate.
In fact, you might not even use the credit card at all! The idea behind getting a card–or an additional credit card–is to provide yourself with options in case things go even further south. Since we’re in a recession, and potentially headed for a depression, having lines of credit open to you might not be the worst idea. If the economy takes another downturn, your ability to access credit might evaporate, so this is kind of a “get it while the getting’s good” idea.
Day 4 Summary:
- If possible, save an emergency fund of at least three to six months’ worth of your living expenses
- If you can’t hit the three-months-of-expenses goal, save whatever you can. Anything saved is better than nothing saved.
- Keep your emergency fund in a high-interest checking or savings account so that you’re earning money from your money.
- If you use credit cards responsibly, consider getting a cash back card that’ll give you cash back every month for buying the things you were going to buy anyway.
- If you don’t have a credit card–or only have one–consider applying for another card to increase your access to credit. As the economy worsens, access to credit will become more difficult. If you lose your job, it’s tough to qualify for a credit card or loan. If you still have a job, you may want to capitalize on that and get a credit card now.
What questions do you have about the Day 4 exercises?
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