Emergency Fund Math

[Fussilet]

Emergency Fund Math


I had to go back to see why I missed this Wall Street Journal story. It was published March 11. Turns out that I was working on a paper that was due the following day, which explains why it slipped through my net. However, none of my readers sent it to me either. Given how controversial this column must have been, I'm surprised I didn't receive several emails about it. No matter. I doubt that Brett Arends has changed his position since last month. Brett, it turns out, believes that it may make sense to build an emergency fund by borrowing against a credit card. And he's not talking about borrowing at 0% either.

From Brett's story (hat tip Liz Weston):

    Usually the sensible financial advice is to pay off your credit cards. It's expensive debt. But people without enough on hand right now may find it makes sense to borrow from their credit cards and put that money in a bank account. Sure they will pay a negative spread, borrowing at 12% and earning 1%. But they may figure that is the price of being prepared.

    The added incentive: Card debt is unsecured. So in a worst-case scenario, credit-card debts are often discharged in bankruptcy court even while some assets, like retirement plans and in many cases your home, may be protected from creditors.

    I'm certainly not encouraging this strategy for anyone who can avoid it. It's not pretty. But who said anything about the current situation is pretty?


This isn't the kind of story I expect from the Wall Street Journal. Brett talks about a negative spread -- borrowing at 12% while earning 1% -- but I'm still trying to figure out where Brett is going to find credit-card cash that only costs 12%. Most cash advances, if you're not getting some promo rate of 0%-5%, is going to cost you north of 20%.

Desperate times call for desperate measures. But can anyone defend Brett's position? If you can, please weigh in.