When my husband and I were engaged, we had a discussion about credit cards. It didn't last long, and went something like this:
Me: What are your feeling about credit cards?
Ben: I don't like them, they scare me. I don't want to ever own one.
Me: I agree.
That's where the conversation ended and it's never come up again. 3 1/2 years later we have not used or needed the use of a credit card. That's not to say that we haven't had unanticipated expenses, we have simply addressed them without credit cards. Our goal is to live our entire lives without one. Some people say it can't be done - challenge accepted!
One of the reasons a lot of people around me say they use credit cards is because it is a good fall back to have in case you have "an emergency". I know a lot of people define "emergency" differently. My personal definition of emergency usually falls in the category of unexpected medical bills, or unexpected car repairs. In all actuality, those should not be in the category of "emergencies worth borrowing money for". I'm working on fixing that in our budget, but I'll talk more on that later.
It is my understanding that many people use their credit cards to pay for "emergencies" that come up (like a blown tire or a broken arm). It is convenient to have the option to pay with the credit card and then slowly pay it back. However, in the process of paying it back, you end up paying more than the cost of the emergency, because you owe interest on the amount borrowed.
So instead of borrowing from someone else and paying them interest, I borrow from myself and earn my own interest. I pay myself back at a rate I can afford, and I never worry about not making payments on time. I do this by having an Emergency Savings fund. I save money for emergencies, and use it only when I need it. Thus, no need for a credit card. Also, not having a credit card has not negatively effected our credit score, as some people told us it would. We have enough loans (we always pay on time) that cover that problem, and I'm happy to report that we actually have a great credit score. We also have a cash savings on hand, in case things get dire. If we were to have some sort of emergency and we spend more than what is in our bank account, our paycheck would go to putting us back into the black, and would not be available to us. In a way that puts me at risk because I wouldn't be able to buy food for my family or put gas in my car. With cash savings, I have a stash that I can use for those purposes that the bank can't say "this has to go towards putting you back in the positive". In a dire situation such as that, feeding my family is more important than getting out of the red.
Now, to be clear, your savings account should not be the same as your emergency savings. At least, in our case, we do them separately. Our goal (we are still working on it) is to have at least 6 months worth of our monthly expenses saved into our emergency savings. This is in case my husband looses his job, or is too sick to work - we will still be able to pay our bills (rent, utilities, car loan, etc...) and buy essentials (food, fuel, personal hygiene products, etc...) while we figure out what to do next. In addition to having cash for the essentials, we also stockpile the essentials when they are cheap (thank you couponing). That is what the emergency savings is for.
In addition we also have a savings account for non-monthly expenses, and we contribute the same amount to it every month. This is for expenses like oil changes and car registration fees or even Christmas - expenses that only come up once every few months, or even once a year. When we track our spending across 12 months we see exactly how much we spend in these areas throughout the year. Then we divide that number by 12 and take that much out of our monthly budget and put it into our savings account for anticipated expenses. That way, when my oil needs changing, I'm not $45 over budget that month. Rather, I "spend" $15 every month on my oil change, and therefore it's already built into my budget. But I don't just do this with oil changes, I do it with all of my car maintenance. I figure how often each section of maintenance will be, including new tires, and set aside a small portion of those costs every month. In this way I can anticipate larger expenses and they don't become an "emergency".
Something else I'm working on having in place is a savings account for uncovered medical expenses - co-pays that don't happen monthly, over the counter medical supplies that I know we'll use often, and vitamins. Last year alone we spent almost $300 on items from the pharmacy section. Not prescriptions, mind you, but items in the aisles in front of the pharmacy. Most of that came in chunks when something happened that required we get medicine for an illness or a supplies to bandage a specific kind of wound. For example, when you get the flu, you don't just need cold and flu medicine - you need day time and night time medicines, something to help your nasal congestion, kleenex, cough drops, etc. Before you know it you've spent an extra $40 on something you weren't planning on. Rather than having that come out of my monthly budget, I pull it from the the amount of money I have set aside specifically for medical purposes. It then gradually get's put back every month as part of my budget.
All of these provisions allow me to stay within my monthly budget, and borrow from myself when I need extra money. Anticipating emergencies also keeps me in check when I have excess money in my bank account. Let's say I don't spend as much money on car maintenance as I anticipated I would - instead of using that money to buy something I want now, I put it back into the car maintenance fund because I know at some point something unexpected will pop up. I'm not falling into the trap of thinking I can spend money just because it is in the account right now.
Obviously I can't anticipate every expense that will come up, but I can do my best to be prepared for it so that I don't have to turn to a credit card or loan agency. I also accrue interest on the amount in my savings while it's not being used. Instead of paying someone else interest to cover my emergencies, I take care of myself and earn my own interest! It also just gives me a sense of security knowing that we can cover expenses if something bad were to happen. It's a safe feeling when you have money set aside for a rainy day.
I encourage anyone reading this to calculate how much money you would need to get you through even 1 month of unemployment. It might seem overwhelming to try to save that much once you see how large the number is, but trust me, it's worth it. Make small payments regularly in order to start building up an emergency savings. We automate ours to transfer into the savings so that we don't even have to think about it. It's automatic, and you'll thank yourself later!
(ps. Obviously you can and should have savings for things you simply want or possibly need. A family vacation, a couples getaway, a dream car, down payment on a new home, etc...)
