$0.00 Emergency Fund???

Liz Pulliam Weston wrote an article called “The $0 emergency fund” for MSN Money.

In this article she states that “Contrary to popular belief, Americans actually do a pretty good job of heeding sound financial planning advice. Most households:

Are saving at least something for retirement. Eight in 10 workers participate in their company retirement plan, according to an Employee Benefit Research Institute study.
Avoid credit card debt. One-quarter of the nation’s households have no credit cards, according to Federal Reserve statistics, while another 30% pay their balances in full every month. Of the rest, half owe less than $2,000.
Have their total debt under control. Only about 11% of households, the Fed says, owe more than 40% of their incomes to debt payments.”

The part that scared me about this is how bad off we really are:

No Savings for Retirement = 20% (She states 16% but 2 of 10 is 20%)
Credit Card debt = 45% have Credit card debt. 22.5% owe more than $2000. (I am in this 22.5%)
Debt not under control = 11% But what about those that spend every penny on day to day living expenses? What about those that go into debt just trying to get by?

She does say, “28% live literally paycheck to paycheck, an AC Nielsen poll found, with no savings whatsoever.”

Using credit for an Emergency Fund

Her point to his whole article is to say you should open a line of credit on your house or credit cards for an emergency fund. But my questions are how many of the 28% do not own a house or have a credit card? Borrowing for emergencies is great if you have the ability to pay it off when the emergency is over.

She states, “Let’s say your take-home pay is about $4,000 a month. Although you have been spending every dime, you make a concerted effort to trim your expenses by 10%. It will take you 27 months — over two years — to scrape your emergency fund together. And that assumes nothing comes up that forces you to raid your cache.”

So let’s say that you took her advice and saved 5% (like everyone makes $4000 a month but we will stick with her example). You need to save $12,000 (3 months of income). $200 a month (5%) for 60 months or five years.

Using a loan amortization schedule that same $12,000 at 7% (a very good rate, just try to get it) will wind up costing you $14,256.86 or $237.61 a month for those 60 months.

So the argument is pay for it now or pay for it later.

I unfortunately chose to pay for it later. I used her advice with out every hearing it.

I am at a point in my life when I should have money to spare. I am earning the most money I have ever earned but yet I am living paycheck to paycheck. I am paying for the things and fun that I have already had. I am paying for it later! So instead of taking 5 years to pay off my debt and have an emergency fund I am looking at 10 years. How about you? Are you living paycheck to paycheck? Do you have an emergency fund?

Just my 2 cents. Jim @ ChangeJarSavings.com