The following blog post is part of The Road to Financial Wellness blog tour. The Road to Financial Wellness is a three-month, grassroots campaign promoting financial empowerment on a national level and encourages people to pursue their dream lifestyle. Find out more about local events near you.
Recently I read a personal finance article titled “76 Million Americans are Struggling Financially and it Doesn’t Matter” or something like that. Curious, I read over the article and found that the author had, like so many people in today’s world, ridiculously unreasonable reasons for why the two main facts in the report that he cited aren’t cause for concern.
The first fact was that roughly 30 percent of Americans are struggling financially or just barely getting by. The author’s reasoning for why that doesn’t matter from a big-picture economic perspective is that, in his opinion, “struggling” is relative. In other words, those 76 million people are probably all not really struggling as much as they say they are, but instead are simply viewing their own financial situations by comparing themselves to the wealthy around them.
The second fact was that almost half of Americans (47%) don’t have the cash to cover a $400 emergency. This fact is also not a big deal, says the author, because credit is so readily available in the U.S. “Just put your emergency on a credit card and pay it off in a couple of months,” he reasoned.
I speak from personal experience when I say that this kind of flippant attitude about money, debt and savings is a big part of what causes large scale economic crises and is what caused my family’s own personal spiral into tens of thousands of dollars of consumer debt – debt that we are currently working our way out of.
So, why does financial wellness matter? Why is using your credit card as an emergency fund a bad idea?
First, let’s address the living paycheck-to-paycheck matter.
We’re Doing Okay, Aren’t We?
I spent 15 years working in personal banking and mortgage banking before I left to be a stay-at-home mom/self-employed person.
After having a first-hand look at peoples’ financial situations for a decade and a half, I can tell you that the fact of the matter is that whether you’re making $30,000 a year or $300,000 a year, if you’re blowing all of it, living beyond your means, not paying down debt and not saving, a financial crisis such as a job layoff is going to smack you down hard.
I’ll even go so far as to say that those making above 75k a year and still living paycheck-to-paycheck will be hit harder by a job layoff than struggling Americans making far less than that.
Why? Because the lifestyle change that will ensue for those making the big bucks will be a hard slap in the face. Those making under that 75k or so mark are likely already used to saying “no” to vacations, to dinners out, etc. Like we were, they’re probably nickel and diming their way through their cash via take-out pizza and small purchase items. To go from a non-luxury lifestyle to a really non-luxury lifestyle will be hard for the lower-income person who is living paycheck-to-paycheck and suffers a huge financial crisis like a layoff, but for those who are living paycheck-to-paycheck on a larger income and are blowing their cash on bigger ticket items, it’ll be a much more difficult transition.
I’ve seen it happen a thousand times in my jobs in the banking world. Cutting golf club memberships, spendy thrice annual vacations, expensive dinners out, kids’ activities, regular salon trips and name brand home and clothing purchases – especially when all of your friends are still living the high life – is hard for these higher income people. Really hard.
It’s just not always as simple as spending less and learning to live within your means in the midst of a crisis – and not always possible. Expensive club memberships often cost money to get out of, and people used to living a more luxurious lifestyle often have no idea how to cut their own hair, care for their own lawn, etc., while those used to living on a lower income are often already experts at DIY everything.
This is just one reason why financial wellness really matters. Why the stats listed above are highly concerning. Now let’s address the lack of savings.
Do I Really Need a Savings Account?
I’ve heard dozens of people say that their credit card is their savings account. My husband and I, we used to be part of that crowd. In the article I read, the guy made a case for the no-savings lifestyle by saying that if he had a $2500 emergency, he’d simply put the bill on his credit card and pay it off in a couple of months.
A couple of months? Seriously? How will that be possible for the paycheck-to-paycheck family? Even that $400 emergency on a credit card will result in long term payments and blowing their money on credit card interest as they make their minimum $25 payment for a year or more, squeezing their already-tight budget even tighter because they had to take on more debt.
For the paycheck-to-paycheck individual or family, an additional $25 a month payment isn’t a breeze; it could very well be the straw that breaks the camel’s back and sends the individual or family from “struggling financially” to “filing bankruptcy”.
This is what this guy obviously doesn’t understand about what it’s like to live so tightly. Most of these people are living one step away from complete financial disaster. I know, because we were them.
When we first started our “getting out of debt” journey, our debt-to-income ratio was 65%. Our monthly debt payments (not including necessities like food, etc) totaled 65% of our gross monthly income.
Living paycheck to paycheck, having no savings; those things are not “no big deal”. They bring inordinate amounts of stress on people and families, and this is why financial wellness is so very important, my friends.
And as I look around me at the financial state of our country, I see the potential for more financial doom. People are once again getting comfy with their debt. Government debt is rising and shows no signs of decreasing. The American dollar’s standing as the world reserve currency is teetering.
If the crap hits the fan in America – or anywhere else for that matter – do you want to be one of those 76 million struggling financially Americans? I know we don’t. We spent too many years living like that, and it sucks.
So do yourself and/or your family a favor: sit down today and make a list of all of your debts, monthly payments, interest rates, etc. Make a budget for the month and stick to it. Take all extra funds and pay off your debt. Sell stuff if you need to.
This 4-part series will show you How and Why You Should Get out of Debt and will give you concrete steps for doing so.
Now is your time to be different. Now is your time to get on the road to financial wellness. The peace that financial wellness will bring you will be well worth the effort – I promise.
What are your thoughts on the prospect of living paycheck-to-paycheck and using credit cards as an emergency fund?
wow read that article. what an idiot! I hope he doesn’t write a financial book. I know too many people though that when an emergency does happen, their credit card is the first place they turn (not talking about the people who put it on their credit card but pay it off right away for travel points). I really don’t think people take their finances seriously enough.
Tell me!! It’s scary to me that people think that way. I agree that people don’t take their finances seriously enough. Much of America is still living in serious denial.
That is not the right attitude to have. A credit card is not a financial plan or an emergency fund. We lived pay-check to pay-check for years and used credits cards for many things. With that plan came lots of money stress, fights, and all sorts of other baggage associated with our money problems. We know better now and it feels good!
Exactly, Brian! Those who’ve been in those tight financial situations like you guys have and we have know that it’s not okay to live like that. This guy obviously hasn’t experienced long-term super-tight financial stressors. They are horrible to live with.
Credit cards have their uses, but being an emergency fund, especially for someone already in debt, is not one of them! It’s hard to believe that someone would see these facts and decide they don’t really matter. That’s just all the more reason we need real financial literacy among the masses.
So true, Gary!! I am amazed at the lack of wisdom that’s out there regarding personal finance. It really is frightening.
It’s scary how many people have that attitude. I’m horrified by the statistics and know that this is why so many people are living paycheck to paycheck. Preach girl, you are speaking the truth! Hopefully we can all wake up from this attitude and empower ourselves through financial wellness.
Exactly!! I think many have settled for paycheck-to-paycheck living for so long that they have abandoned all hope of living a debt free, financially stable life, but it can happen and is well worth the effort it takes to get there.
Those statistics are scary. It is just ridiculous that so many people think that living paycheck to paycheck and racking up credit card debt is just the norm. My co-workers are like that and they earn a pretty good income. When you have a lot of credit card debt and can’t save anything, you have to do SOMETHING. Cut expenses/earn more etc…yet many people just continue doing what they’re doing and rack up even more debt. It is a vicious cycle.
“When you have a lot of credit card debt and can’t save anything, you have to do SOMETHING.” YES, so important not to continue living like that. You never know when the income rug will be pulled out from under you. Great comment, Andrew!
Ugh. It really shocks me that the author was advocating credit cards as a replacement emergency fund. Yes, in an absolute emergency with no other avenue available, a credit card can be a lifesaver. But it should always be last resort, not the first go-to option. A real emergency fund not only helps reduce stress when things break down, job loss occurs, etc but helps avoid creating debt, which is why it is so important to have one. When I younger, just starting out, money seemed confusing and I was doing all right. But I kept putting off learning about money and investing due to fear and the fact that retirement seemed so far away. Our financial illiteracy really hurts us, all of us, because wealthy or poor or in-between, so many people have no idea how to make good money decisions.
Your last line spoke volumes, Tanya!!! Financial illiteracy really does hurt us all!!! We need to be better as a people with managing our money – for everyone’s sake.
A credit card and an emergency fund are not the same thing, nor are they interchangeable. The fact of the matter is that debt is crushing folks and we need to be more knowledgeable with our money. That article sounds very irresponsible 🙁
“The fact of the matter is that debt is crushing folks and we need to be more knowledgeable with our money.” Well said, Mackenzie!!! As much as most don’t like to admit it, debt really is crushing folks!! And only we as individuals can change our own financial situation. Great comment!
I agree with you about those making over $75k are hit harder emotionally when their financial situation changes for the worse. I made above that mark for several years it allowed my to become debt-free, build up a nest egg with a 50% savings rate, and go on nice vacations & not blink an eye.
The job lifestyle was killing me & my wife would have essentially been a single mom. So we jumped ship and swung to the other end of the income pendulum.
Yes, this year has been a transition with building a house & entering self-employment, but two years ago I never thought that $35k or even $40k would seem like a fortune.
Sorry for the story (I keep meaning to write my golden handcuffs story on my site) but thanks for mentioning this fact. I have former co-workers that would think living on $35k would probably be the equivalent of being homeless.
Powerful comment, Josh. I would love to see that “golden handcuffs” post. Write it up! Ironically, I once figured out what we would need to live on as a family of six if we had no debt and we could easily make it on 40k a year. It would be a simple life, but we’d be well fed and have all of our needs met. I think “needs” is the key word there.
So cool that you and Brian are both involved in this Road to Financial Wellness initiative. That flippant attitude towards financial health bothers me too – I think because I used to have it. I had what could be called an arrogantly casual attitude to all things personal finance – because I was “above” such petty concerns. Ugh! Things have changed. And that’s a very good thing.
Ruth, you’re doing AWESOME!!! I am so happy for you as your willingness to confront the woman in the mirror has resulted in terrific changes for yourself and for your family as a whole – great work!
That guy’s attitude is terrifying! You’re not okay if you can’t pay off an emergency bill in a month. Especially if the bill is $400.
I have to remind myself that we’re not living paycheck to paycheck because it feels that way. I get my paycheck just in time to pay our credit card and then I schedule the remaining money for monthly expenses. The thing is, money (almost) always goes into savings. Which means we’re not actually living paycheck to paycheck. Still, when you have to plan for a whole month, the last few days can get a little hairy, which can lead to a feeling of precariousness.
Isn’t it??? You’ll be there soon, Abigail. You guys are doing a great job at working toward financial freedom!
“Even that $400 emergency on a credit card will result in long term payments and blowing their money on credit card interest as they make their minimum $25 payment for a year or more…” I couldn’t agree more. This is when people fall into debt traps and spend months, years and several hundreds or thousands of money paying off “a small” amount of credit card debt.
Thanks for being part of the blog tour!
Exactly, Jason!! I’m convinced this guy has never actually lived paycheck to paycheck with tons of debt. He seems to be clueless about the stress it brings. Thanks for including me!
There is another greater way to deal with emergency expenses, not only credit card, Laurie. Most people nowadays should be informed about financial management to deal with such situation.
Should be. 🙁
I could not fathom living pay check to pay check with a credit card as my emergency fund. How can anybody give this advice to people who do not understand the implications of this? The sad truth is that many people do think like this.
The point of an emergency fund is to hopefully eliminate the need to go into debt from an unexpected event. Anybody living paycheck to paycheck cannot afford to increase their debt as they will not be able to afford their payments and like you said file for bankruptcy.
I know, right?? SO frustrating that so-called “experts” are giving this type of advice to people.
Ho boy, you could have been writing about us! We felt so secure, knowing we had lots and lots of credit. It sucks being financially illiterate. Sounds like a great series indeed!
That was us too, Kay. And I think that is why the article frustrates me so much. Having lived that life for too many years, I can testify to the toll it took on us, and still takes on us as we work our way out of the mess that occurred from following that advice.
I suppose I can see some of the logic of using debt in emergencies. I mean, if push came to shove, I’d do that before having the lights turned off or going hungry.
But the idea that credit card debt should serve as an emergency fund, as a matter of planning and in advance, is not a great plan. For one, the opportunity costs of keeping a few thousand dollars in cash, or even ten thousand, is not that great. You’re not missing out on huge investment opportunities by having some cash on hand.
On the other hand, getting into $10,000 of credit card debt can be seriously costly, because the interest those companies charge is enough to put a dent in a paycheck to paycheck budget, and far, far exceeds the type of investment return you’d ever earn.
More importantly, learning to save up an emergency fund is often the very foundation of good financial habits. If you can learn to save up $1000 like Dave Ramsey points to in baby step one, you can move on to just about any other financial challenge after that.
Well said, my friend. This is what I think the author doesn’t understand: that those types of minimum payments and accruing interest really could put a painful dent into an already-tight situation. It could change things from “paycheck to paycheck” to “filing for bankruptcy” very easily.
I was thinking about the comment regarding those making over $75k being harder hit. I think it goes back to my parent’s mantra “what you don’t have you don’t miss”.
I am always horrified when I watch programmes where folk are building their dream homes (often the most ridiculous structures) and are buying most of the supplies on the credit cards which are all maxed out because the bank will not lend more on the original loan/mortgage. Do they ever ask themselves why?
I know it was in the dark ages, well 60 years ago, but my parents managed to build their own house, mortgage free. It took years and things were done bit by bit. We never wanted it ALL and we knew that we could not have in NOW!
I think you hit the nail on the head there, my friend. The whole lack of delayed gratification. When I was in the mortgage biz I saw the outlandish homes all the time. No willingness to wait and do it with cash – gotta have it NOW. The lending industry as a whole has sold people the koolaid, and the people have willingly bought into the lie.
I never want to live paycheck to paycheck. That’s why I save before I spend, so that all savings would be for investment and for emergency fund. And, it is really less stressful when there’s a financial wellness.
Smart move, Kelly. Yes, it really is less stressful!