Millennials Are Using Credit Cards for Their Emergency Funds, Which is Not Great
NEW YORK, March 16, 2023 (Newswire.com) - Credello: Millennials are the generation of individuals born between 1981 and 1996. They're adults now, and they're asking critical questions about their finances.
Some might ask will a personal loan help build credit, while others are curious about the different ways they might invest their disposable income. More than ever, though, Millennials are trying to figure out the best ways to set aside money for a rainy day.
There's a trend of Millennials using their credit cards for their emergency funds. We'll discuss that right now, and we'll also explain why it's a risky move.
What is an Emergency Fund?
An emergency fund is money an individual or family sets aside to use if they get hit with an unexpected expense. Such an expense might include the family car breaking down. There may also be a sudden medical bill.
Other emergencies might involve a household repair, like the furnace malfunctioning. If you own a pet, maybe you need to take it to the vet for an unexpected surgery.
Whatever the reason, a time might suddenly come when you need to use that emergency fund. Many financial experts feel that you should have one.
How to Stockpile Money for an Emergency Fund
Millennials, like other generations, usually understand that the best way to stockpile money for an emergency fund is to save up a little at a time from paychecks. If you have excess cash from your salary once you've paid off expenses like your rent, car payment, utility bills, and grocery bills, you can put that money into a savings account.
That is the simplest way to create an emergency fund. If you're married or cohabitating with someone and splitting your bills with them, you may have two sources of income you can use to create an emergency fund. That makes it easier to start one than if you have just one income source.
When Credit Cards Act as Emergency Funds
Millennials have a substantial amount of debt. That amount grew quite a bit, collectively, during the pandemic. That's not surprising since many households with Millennials struggled to pay their bills during that time.
These families and individuals might not have an emergency fund, at least not in the traditional sense. Instead of accumulating money in a savings account, if an emergency arises, these households may turn to a credit card to pay for an urgent bill.
The reason this is potentially problematic is that these households might not necessarily make enough money through their jobs to pay off that entire credit card bill at the end of the lending cycle. This means that, instead of liquidating their emergency fund in the bank to pay for the emergency, they will end up owing money and paying interest on it following an unforeseen expense.
What Can Be Done About This?
The most obvious solution is for Millennials to get in the habit of putting any money from their paychecks into an emergency fund in the bank as quickly as possible. Now is the ideal time to do it since the FED has raised interest rates, and Millennials can earn more money for every dollar they set aside.
If you're a member of this generation who feels that you don't need a traditional emergency fund because you have a credit card that you haven't maxed out yet, you should probably reconsider that strategy. If a sudden bill appears, you can pay for it with cash from your savings account. You won't have to pay with a credit card, thereby accumulating interest if you can't pay back the total amount you borrowed immediately.
Creating a traditional emergency fund can help tremendously if you get blindsided by a sudden bill.
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