Is credit card debt the new emergency fund?
SALT LAKE CITY — Gwenyfar Rohler manages her family's bookstore in Wilmington, N.C., and wishes she had an emergency fund.
"I'm going to have to walk if the car breaks down," Rohler says. "If my dogs have an emergency veterinary bill, there is no way to meet it. It is just roulette at this point."
Changes in the book-selling industry and a down economy took its toll on Rohler's bookstore. It got worse when the bookstore's building was condemned and Rohler had to find a new location in 2010. That was the last time Rohler, who is a freelance writer and radio personality, had an official paycheck from her business.
"When it comes time to do payroll for the staff, sometimes I swipe the credit card through the machine if we are $400 short," she says. "Then I am in that terrible game where I can make a minimum payment and then have to borrow back the money as soon as I pay it."
A new poll by Bankrate.com, a Florida-based consumer financial services company, found that only 51 percent of Americans say they have more emergency savings than credit card debt. This is the least amount of savings Bankrate.com has found since it started tracking the issue in 2011. The amount of people who have more credit card debt than emergency savings is 28 percent, while 17 percent say they have neither emergency savings nor credit card debt.
Greg McBride, chief financial analyst at Bankrate.com, says people are likely using credit cards as an emergency fund — and this is a problem. "Credit cards carry very high interest rates," he says, "and card issuers are prone to cut credit limits at the time you would need them as a 'emergency fund' — such as at times of financial crisis."
This is why emergency savings are a better idea, he says: "Money in the bank is yours," he says.
Yet, as the Bankrate poll shows, Americans are not saving as much as they should.
"The household savings rates following the recession are still anemically low," McBride says. "People need more savings than they have. They haven't prioritized savings high enough."
McBride says, however, that people recognize the value of emergency funds more than before — but stagnant income and high household expenses or even prolonged periods of unemployment and underemployment have kept savings down.
And sometimes people just are not aware of how they are spending their money.
"I can't tell you how many times people say they have no money to save while holding a $400 phone in one hand and a $4 coffee in the other," he says.
Jerry Mason, who teaches personal finance classes at Utah Valley University in Orem, Utah, likes emergency funds, but doesn't think they should be the first pillar of financial independence.
"The first is having a good insurance package," Mason says. "An emergency fund of $2,000 or $3,000 isn't going to help in big emergencies."
Insurance protects against huge losses, he says, and is a better expense than an emergency fund.
"But an emergency fund comes along quickly as the next important thing to do," he adds.
One of the things Mason recommends is that people keep track of all their expenses — check, credit, and debit purchases on their check logs.
"That way they have one number to see how much they have," he says. "Most people who use credit cards, however, don't do this. People need to focus on how much they have to spend."
He says the high credit card debt isn't a result of using them for emergencies as much as it is using credit cards for impulse buying — although he says medical bills are huge problem for people as well.
McBride says he thinks savings is often a personal choice: "People need to make tough decisions in regard to building their savings," he says.
One way to get started, he says, is to set up direct deposit into dedicated savings accounts.
Rohler, unfortunately, does not have that luxury and is looking for the economy to improve and her business to grow. She does have one good thing going for her: an "emergency fund" that money can't buy.
When the bookstore's building was condemned in 2010 her family had to put the inventory into storage and find a new location.
Nearly 300 people from the community came to help move the inventory into storage and then later about 200 showed up to help move the books into the new store location.
"I know what it is like to be in the final scene of 'It's a Wonderful Life,'" Rohler says.