Last week we talked about the importance of setting up an emergency account and easy ways to get started. You may see the merit in emergency accounts, but you might also be asking yourself two questions: “Why not just use my line of credit?” and “What if I have debt? Isn’t it better to pay it off and forego any savings?”
1. What’s wrong with using my lines of credit as my emergency account?
After all, that’s how the banks pitch them. At some point, we’ve all received the line about “the convenience” of having thousands of dollars at our fingertips in case the roof caves in or some other problem crops up. All for a low interest rate. With savings rates at an all-time low, most of us do succumb to our line of credit if an emergency arises. There’s nothing wrong with that if you have the discipline to borrow what you need and pay it back in a timely fashion, notes Stephanie Holmes-Winton, a Halifax-based financial advisor.
But therein lies the problem: disciplined debt re-payers are an anomaly. Instead, most of us give into the temptation factor and delay repaying. The thinking goes like this: We need $2,000 to repair the car. Since we’re tapping our line of credit anyway, what’s another $1,000 to book that cottage for a week? So we end up further in the debt hole versus if we already had that $2,000 in cash savings.
2. I already have some debt. Isn’t it better to apply any money earmarked for savings to their debt?
Here’s the thing: people without any savings are more likely to abandon debt repayment strategies once an emergency hits. As Holmes-Winton says, life is always changing and emergencies of some kind will crop up.
Picture this scenario: all your savings goes to your debt. Then your roof caves in to the tune of a $12,000 bill. Since you have no cash savings whatsoever, you plop down your credit card and watch any progress you made with debt repayment disappear. You feel defeated and wonder what’s the point of bothering to save in the first place. That’s why it’s far better to save and pay down your debt simultaneously.
Deanne Gage has written about all matters financial since 1999. She writes, edits and strategizes out of her Toronto home that’s partially under construction. Besides money issues, she enjoys running fast, jazz music and drinking a quality glass of Merlot. Her two-year-old daughter is quite familiar with money: she borrows it from mom’s wallet for her toy cash register.