KNS Financial

Personal Finance From a Biblical Perspective

I Hate To Say This, But I Was Saved By A CREDIT CARD!!!

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I have written a few times on my weight loss blog about having to bring my car to the mechanic. I think I have made 5 trips since the end of November for the same problem.

During this time we have replaced practically the entire cooling system – including the radiator! After spending $1,600 to do this, my car started overheating a week or two later. At the same time, someone brought a car like mine (just one year older) in to my mechanic with the same exact problems. They found air in her cooling system just like mine! However, they did not detect any problems inside of her cooling system, as with mine.

This prompted him to check the Internet to see if this problem was common. He not only found tons of complaints in forums and other places, but he also discovered that this is something that GM knows about but are choosing to ignore. It seems that the problem is with the intake manifold gasket, and it usually happens after the car is already out of the warranty period.

It cost us about $650 to replace it (this was mainly labor, since the job took many hours), bringing our total to fix this problem up to $2,250! That doesn’t even included all of the countless hours on the road to and from the shop, who knows how much gas and wear & tear on both of our vehicles, as well as dozens of hours driving, worrying, and even sitting on the side of the road waiting for the engine to cool down.

[Find out how to save money on car repairs!]

I’ve talked in the past about how having an emergency fund can help when these types of necessary but unexpected expenses pop up. Fortunately, we were able to pay for some of these repairs (specifically replacing the intake manifold gasket) by tapping our emergency account. However, in order to cover the other $1,600, we would have had to drain the account completely!

Saved by Credit Card

I hate the idea of have a $0 emergency savings account, so we really needed to come up with another way to pay for these expensive repairs. Since we are deeply in debt bondage, we don’t have a lot of “wiggle room” when it comes to our expenses and our paycheck (most of our expenses consist of nothing more than debt payments), and although we try to keep a cushion in our checking account, we don’t have an extra $1,600 sitting around.

We could have tried to take out a personal loan, but I really don’t like the idea of owing people money. Another option would have been to take out a payday or other short-term loan, but we are really trying to avoid increasing the amount of interest we have to pay out this year.

So, as a personal finance blogger, I had to turn to the one place that was probably the least expected…a credit card! I’ve written about the benefits of credit cards in the past, so it shouldn’t come as a surprise that I don’t hate them. I just hate that many of us us them for the wrong reasons.

Last year my wife and I found a credit card that would allow us to charge any car repairs over $299 and have the interest deferred for 6 months. This means that if we can pay off the balance by the end of the 6-month period, we will have received an interest free loan. 🙂

Normally, I don’t like to be put in a position to have to place an expense (or multiple expenses as in this case) on a credit card, especially since we already have a ton of debt, but in this case it seemed to be our best option. The very worst case scenario (outside of us needing additional repairs) has us draining our savings at the beginning of the summer to pay for the repairs, but if we are able to use every extra dime to pay down the credit card, things won’t be as bad for us.

So this is definitely a case where having a credit card was a great benefit to us. I just pray that we can get back to moving in the right direction with our debt repayment plan…having our car need over $2,200 in repairs (and it needs more, plus my wife’s truck has a few things wrong with it as well) definitely set us back.

photo credit: Dan Esparza

Reader Questions

  1. Have you ever used a credit card to bail you out of a jam? Not, to buy a tablet or a toy, but for an actual emergency.
  2. Do you think we should have just emptied our savings account even though the credit card may not cost us an interest payments? If so, why?
  3. How do you feel about someone not having an emergency savings account at all, and just having a credit card or two (especially a rewards card) to pay for emergencies?

An Emergency Fund: The First Step to Financial Independence

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When we think of financial independence we often think about having a lot of money, of having a fully loaded retirement plan, a house that’s paid for and being able to spend money any way we want.

That may be financial independence on the high end, but you’ll never get there without taking a few less glamorous steps beforehand. One of those steps is creating an emergency savings fund. It will be the foundation of everything that comes afterwards.

Why An Emergency Savings Fund

Emergency Savings Fund

You May Not Be Ready For Stocks, Bonds And ETFs – Yet

Talk about financial independence often focuses on investments. Where’s the market going? What are the hottest stocks? What winning ETF will get me to my investment goals? How much do I need to save for retirement?

That’s all good, but if you don’t have any of those activities going right now, you need to back up and do something more basic. You need an emergency savings fund. As boring as it sounds, an emergency fund does several things that will start you on the road to financial independence:

  1. It gets you a basic savings balance
  2. It proves that you can save money, which is critically important if you never have before
  3. It provides a measure of insulation between you and financial desperation
  4. It lays the foundation for greater savings—and investments—later
  5. When you have investments, an emergency fund will keep you from having to liquidate those investments to pay current expenses or emergency situations

I think it’s safe to say that until you get the items above going, financial independence will never be much more than a dream.

Starting Off On The Wrong Foot

Financial resources have three main components in most households: income, savings and credit. Each of these can be used to pay obligations, but they aren’t all equally up to the task.

1. Income. This is the preferred resource to pay obligations, especially current ones. When your income meets your current obligations your household budget is under control and you’re ready to move on to better things.

2. Savings. In a perfect world, savings should be available to back up your income in the event that it isn’t enough to cover your immediate expenses. You’re in a good place if that doesn’t happen too frequently, but it’s there if you need it.

3. Credit. Credit should be used only for the purchase of major assets that will provide you with benefits for a long period of time. It’s a way to spread the expense of high cost items over a longer time frame. Houses, cars and a college education are the best examples, and even then only if they aren’t taken too far. Credit can also serve a secondary role as the back-up to your savings, in the event they won’t cover a large run of expenses.

Income and savings are the preferred financial resources, with credit as a need-to-use-only resource. The problem is that for many people, it’s not savings that backs up their income, but credit. This comes about because while savings take time, effort and sacrifice, credit comes about with the swipe of a card.

The need to save money is skipped entirely. That’s bad because having savings, and at least an emergency fund, has fantastic advantages…

An Emergency Savings Fund = ”Sleeping Money”

Have you ever lost some sleep, or even an entire night’s worth, worrying about paying your bills? More specifically, this is likely to happen when you really can’t pay your bills. This is what happens when your budget is stretched too tight, when there aren’t enough resources to meet obligations.

If nothing else, having just a few thousand dollars sitting in a savings account might bring you the blessed sleep that you need to live your life.

Debt Can’t Go Away Until You Stop Using It

An abundance of debt is usually accompanied by an absence of savings. Is there a connection? I think so.

When you have no savings, you’re forced to rely on credit to cover those income shortfalls. And when you’re constantly tapping your credit lines, you’re going deeper into debt.

Most people who are in debt would do just about anything to get out, but that can’t happen until you stop using credit. The only way to do that is to live on less than you make and be prepared to cover emergencies with your savings—a true emergency fund.

Being Ready For Trouble

When you have savings—at least an emergency fund—you’re ready for problems. It’s not that you want them to happen, but rather that you’re prepared if they do. Any trouble you face will be that much easier to deal with if you have a savings cushion to back you up. Savings give you options, and that can take the panic right out of a troubling event.

The more you have saved the more trouble you’re ready to deal with. But at a minimum, you should have an amount sufficient to cover predictable shortfalls, such as major car repairs, medical deductibles, or a job loss.

When you’re ready for these, life becomes more predictable, and that puts you in better control – it’s almost like having a self-funded insurance policy.

How To Get There

There are different ideas as to how much you should have in emergency fund, but I think the best is having at least an amount equal to 30 days of living expenses. If you have 30 days of expenses saved, you’ll have enough to cover the first month of a job loss, which will give your unemployment checks a chance to start showing up.

How do you reach that goal?

  • Start by selling anything you don’t need with a garage sale or on Craigslist, and banking the money.
  • Bank your bonus, your tax return or any gift money you receive.
  • Bank 10% of your net income for the next ten months, or use some other percentage strategy that will get you there. A temporary part-time job can help with this too.

Any difficulty you’ll encounter in building your emergency fund will be less than the trouble you’ll be getting out of by not having one. That’s the first step to financial independence. Everything else will flow from that.

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