Happy Sunday!  I’ve taken the past couple of weeks to write more general posts but had a couple of really good specific questions to address this week.  Have I answered your question?  If not, why don’t you ask me?  Pretty much any question is fair game!

The peace that an emergency fund brings is awesome!  However, I have always wondered about the 3-6 months range.  How does one determine which is right, 3 or 6?

I wish I could give you a magic answer that would fit your situation (as well as everyone else’s).  Unfortunately, I can’t.  There are a few things I would ask you to look at while you are building up your long-term emergency fund.

First, remember we’re looking at saving 3-6 months of household EXPENSES, not household income.  Some people overlook this piece and think they have to save 6 months of their salary.  WHEW – that’s a big number.  In that same vein, you need to consider how much “fluff” there is in your household expenses.  If you lost your job tomorrow, would you keep the super-deluxe digital HD Cable with all the sports add-ons and unlimited on-demand movies?  I know, I know, that’s a bit of a stretch, but what could you cut out and still meet all your household needs?  In other words, if you boil it down to how much you REALLY need per month, how much is it?

Second, how tight is your existing budget and how much can you realistically save?  If you can only scrape together $100/month to save toward emergencies, is it more realistic to expect you could save three months’ worth of expenses or six months’ worth?

Third, how hard do you believe it would be to find replacement income through another job…or anything else legal that would make you some money (be honest and REALLY consider this)?  Take the number of months you believe it would take you and double it.  That should almost give you an accurate number in today’s economy.

When you consider these three questions, along with your “gut” on how much you should save, that is the amount you should aim for.  I know you wanted me just to tell you, but sorry…this one is your call.

Why don’t you use credit cards?  Aren’t you missing out on the rewards, purchase protection and other “perks” of having a card?

Rather than make a list of all the reasons to avoid credit cards, I’ll give you my top three reasons why I think you should avoid snakes…errr…credit cards…and, if they aren’t enough, feel free to ask me to keep going.

1. I don’t have the discipline to control my spending with a credit card like I do with cash.  When I hand someone a $100 bill, there is an emotional change I go through.  Swiping a card doesn’t do that.  Thus, I’m going to spend more on plastic (and research shows this is true for all of us).
2. If I make a purchase with cash or with my debit card and I don’t like it, I can still return it to the store or find some way to get my money back.  Credit card companies have long hailed their “purchase protection warranties” on purchases made with a card, providing a safeguard for you if you want to dispute the charge or return the purchase.  In fact, card issuers will sometimes extend the warranty on certain purchases.  I’ve never had a problem returning something I bought as long as I tried to do it according to the rules.  I’m sure there is some sort of benefit to that piece of card ownership, but I bet a quick poll would bear out that this is a rarely, if ever-used benefit.
3. I worked for a credit card company – I know there are lots of pitfalls.  I know that 29% interest is pretty standard fare for credit cards.  I know that $35 late fees await anyone who misses a payment, even if only by a day or two.  I know that payments get lost in the mail, credit scores get damaged, terms change (never for the betterment of the customer), and I know there are lots of other things you have to watch out for as a consumer.  Cash keeps it pretty simple – you see the price of something, you count out the right number of bills to pay for it.

As far as the perks and points and miles, etc., I think I’ll be okay without them.  They are a legitimate benefit, but are you going to beat a system that makes billions of dollars annually in revenues off of interest, late fees, etc.?  One last thing – so you don’t feel I’m being too much a hypocrite, I will admit I do have a credit card.  Yes, you read that correctly – I own and periodically use a card.  I keep it in the drawer at my house because occasionally I’m asked to make HUGE purchases in some of my contract work for things I may order online ($10,000 in a month isn’t out of the realm of possibility).  I don’t want to have that huge chunk out of my checking/savings accounts so I charge them and pay them off immediately with the issued check from my client.  I NEVER make any other purchases on the card beyond this.

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