We wrapped up our blog Credit Score Assassination by saying that we need to building our safety net safely. Exactly what do we need to do in order to achieve this safety net?
What exactly is a safety net?
When discussing our future, we need to have access to emergency funds. This should be the first item on any financial freedom venture. Conventional wisdom states that we need to have quick access to three to six months of our income to be safe. As mentioned in Credit Score Assassination, we don’t want our safety net to be from Credit Cards.
I’m not rich and have no access to additional funds
Join the crowd. Everyone isn’t a millionaire. However, everyone has the ability to build themselves a safety net. Let’s say you make $10.00 an hour and you work 40 hours a week. We will assume a tax rate of 22%. Therefore, you will be bringing home approximately $312.00 per week. This isn’t taking into consideration state taxes, along with a few other items, so let’s just round our number to $300 per week. Let’s start off by taking 5% of this number and putting it into savings. We now have $15 per week in our savings account. During the course of a year, without interest, this takes us to $780.00.
Show me the money
You can see that with investing 5% of your income per week that it is going to take some time to reach our goal of 3 months worth of a safety net. Let’s discuss investing 15%. At a rate of 15%, you new weekly amount will be $45 and your end of year count is now setting at $2,340. This is getting fairly close to our goal of 3 months. Now, take into consideration the ability to invest this money into an index fund that makes 8%-12% annually. What happens to this money now? The $2,340 is now sitting between $2,525 and $2,620.
Pitfalls of Credit Cards
Credit Cards do the exact inverse of what investments do for us. Credit cards are the investments for the credit card companies and they are getting great returns . Their high interest rates are making them marvelous gains, while your dollar becomes worth less. In turn, your investments historically make gains. Take this into consideration the next time you are considering using a credit card for your emergency purchase.