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Originally Posted by jeffrey
Chances are you have some credit card debt. Let's say, again purely as an example, that you're paying 18% interest on a $5000 outstanding balance on your credit card. While the money in your savings account is earning 2% (which is actually 0% when inflation is factored in), you are at the same time paying out 18% to the credit card company for the same amount. Taking this into account means that your $5000 in "savings" is actually losing 16% a year (or 18% with inflation factored in). While this is definitely not a rosy picture when you thought your were saving money all this time, it gets even worse. You are required to pay taxes on the 2% interest you earn in your savings account while you are paying the credit card interest rate with after tax dollars.
When you look at your savings from this reality, the first thing that should be obvious is that it makes no sense to "save" and thus the title of this article. Don't save money! Instead, take any extra money you have and start paying down your outstanding credit card (or if you don't have credit card debt, any other) debts with it. By taking this approach, you will be getting an 18% guaranteed return (or whatever your current credit card interest rate is) on your money instead of losing 16+%. Better yet, you will save yourself hundreds, if not thousands, of dollars in interest charges and you will move toward the point when you really can save money for your future.
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Jeffrey, I used to feel the same way about this issue and mostly for the reasons you noted. I still believe those factors have to be carefully weighed in deciding how much, if anything, to keep in a savings account. We also need to weigh what other sources of readily available cash we have. For example, if worst came to worse, a person with a ROTH could draw out some of their contributions tax-free and without penalty to meet short-term needs.
But on the whole, I am a big believer in having an emergency fund for three simple reasons:
1) There are some things you can't put on a credit card: Mortgage payments and CC payments being two of the biggest. So while many people can now pay utility bills and almost anything else with their CC, we still need cash to pay the CC bill itself if our income stops for any reason.
2) A CC is not an emergency fund. It can be used to pay for almost anything you have to buy, but getting
cash from a credit card not only costs you a 'cash advance fee' but also usually carries a higher interest rate that will stay in effect untill all of your lower-interest purchases on that card have been paid off. So, in any situation where you need cash, a savings account or something similar is king.
3) People tend to underestimate their chances of being laid off and the amount of money they would need if it happened. Do you work for a big prosperous company with no danger of layoffs? Enron! Do you feel confident you can survive on an unemployment check? It takes 2-4 weeks before your first unemployment check arrives (depending on where you live) so how will you pay your bills in the meantime?
I'm the first to admit that keeping a full month of income in a savings account while you still have debt is costly and inefficient, but it is also a very good idea. Like auto insurance and house insurance that we hope we'll never use, an E-Fund is an 'insurance policy' that's worth paying for because the unthinkable really does happen.