Who is Holding Your Financial Safety Net?

Every weight lifter needs a spotter in case they can’t quite manage that last rep. Every mountain climber needs a safety harness and ropes in case they lose their grip. And every consumer needs a safety net in case they run into hard times like a big medical expense or a job loss. Financial experts who rarely agree on anything offer universal support for building a safety net to deal with emergency expenses. We can agree that everyone needs a safety net, but the real question is “Who is holding your safety net?”

Before we answer that question, let’s gain some perspective by looking at how equipped America is today to handle unexpected expenses. The data doesn’t paint a flattering picture. Here are three fast facts from Bankrate’s 2024 Annual Emergency Savings Report:

About 1 in 4 people in our country have no emergency savings. That means they have no safety net at all. That is a scary place to be when one big expense can knock you off your feet. 1 in 3 people would borrow to handle a $1,000 emergency, again showing that many people are working with a very thin margin, even if they have a little money saved.

It is a safe bet to say that more than 35% of people treat their credit card like a safety net. In fact one of reasons many people sign up for a credit card is to have access to additional spending power “in case” they need it. But does it really make sense to use a credit card as a safety net?

Is Your Credit Card a Good Safety Net?

For the disciplined spender, especially one who is early in their career, the argument of using a credit card as a safety net has some merit. If I have a credit card in case I need to use it for an expense I cannot cover, I feel more secure. That is not a bad thought, but it does have one flaw. Most people don’t limit themselves to using credit cards for emergencies. The convenience and habit of using a credit card gets in the way of using it for “emergencies only.” In fact, an MIT study concluded that using a credit card actually accelerates spending. Ultimately, if you are spending more on a credit card, you are saving less for an emergency situation.

Long-term data bears out that thinking. In 1970 only 16% of American families had a bank-issued credit card. Most people who had a credit card at that time typically had a card associated with a retail store. A little over a generation later in 1998, 68% of American families had a bank-issued credit card. In 1970 when credit card use was low the personal savings rate (money saved after expenses and taxes were paid) hovered around 12-13%, but by December 1998 that number had dropped to 5.5%. Current numbers are even worse with the September 2024 personal saving rate falling to 4.6%. There are other factors like inflation that contribute to the decline of the savings rate, of course, but don’t undervalue the allure of wielding more spending power than you can support with your cash or income. Putting money toward payments and often late fees and finance charges saps cash flow which would have historically gone towards savings.

Why does that matter? As Americans put more of their purchases on credit cards, they overspend compared with debit cards or cash spending which drops their personal savings rate. A lower rate of savings means less ability to handle emergencies, which means reaching for a credit card to bail yourself out, even to pay for a small emergency. It is a cycle that people claim to want to break — remember 59% of people are unhappy with their level of savings — but it appears people are unable or unwilling to make a change. After all, swiping a credit card at the checkout is just so doggone easy to do.

Perpetuating credit card use as a safety net is not a good approach for the long term. If you can’t afford a $1,000 emergency and you put it on a credit card, that payment can easily compound with a late fee and an interest charge. With interest rates often running in the 19-29% range today, that $1,000 compounds quickly, and your credit card safety net turns into a tangle of ropes that restrain you financially. Your credit card company is benefiting more in the event of an emergency than you are. If you can’t trust Visa or American Express to provide your safety net, who then can you trust?

Trust. That is the perfect word. Safety is fundamentally a matter of trust. You wear a safety belt or a helmet because you trust that it will be able to help in case of emergency. The last thing you would expect or want is to be taken advantage of during a time of crisis, and while a card might bail you out in the short-term, it does come with a cost. That cost is either interest to pay off the debt, opportunity cost of not stashing away that money into savings, or realistically both.

Be Your Own Safety Net

When you are answering the question of who holds your safety net, the best answer is found in your mirror. You. No one will look out for your own interests better than you. You can trust that you will have your best interest at heart. You won’t charge yourself interest if you need to pay for an emergency. You are plainly the best choice for holding your own safety net, but how do you make that dream world a reality?

There are four habits that will help you build your own safety net and frankly all of them are very boring and completely effective.

Pay yourself first. I’m a Christian, so I believe in paying God first, so my giving actually comes first, but the next portion of money after charitable giving should go to your savings. It’s the standard airline safety speech approach. In the event of an emergency, put your own oxygen mask on first, then help others. You can’t help your kids, family members, or other passengers if you are passed out on the floor from lack of oxygen, can you? Likewise, you can’t help others if you are not in a position to weather the emergency yourself. By paying yourself first, you can put yourself in the mindset of only spending what is left. If you decide to save 10% of your income, then you will make spending decisions based on the remaining 90%. By saving and “paying yourself first” you will prioritize savings rather than throwing the last crumb of your paycheck into savings. Developing that one habit is the biggest factor in becoming your own safety net.

Do a monthly budget. I told you this is boring. I like to say that budgeting is the flossing of the personal finance world. Everyone knows they should do it, but no one wants to. If you use a budget to plan your saving and spending, you can avoid the biggest mistake people make with money. They unconsciously overspend on expenses like groceries, eating out, streaming subscriptions, and coffee. When you plan your spending and track it, you will see where your money really goes, and you can make adjustments. Until you see your actual expenses in total each month, you will live by “feelings” which doesn’t aid the end goal of savings. Feeling like “we eat out a couple times a week” can easily turn into $1,000 of restaurant spending for a family. Americans on average spend over $2,137 a year on coffee away from home, yet few couples would admit to spending $356/month on their coffee runs. A properly tracked budget would expose those expenses and allow you to decide if you want to save money, or drink Starbucks. I’m just saying that a $100 Keurig might lower your coffee spending and increase your savings rate. It’s all about tradeoffs. If you are new to budgeting, check out this article that helps you with the basics.

Automate your savings. Boring again, but at least this tip lets you use technology. When you get your paycheck, not only can you pay yourself first, but you can automate that transaction. Most employers allow you to split a direct deposit check into multiple accounts, so you can transfer the majority of your check into your checking account and have a portion of your check go directly into a savings account. If you don’t have that option, you can automate the transfer within your bank or credit union by setting up a recurring transfer to coincide with your paycheck. If your paycheck is deposited every two weeks, the following day you can have an amount of your choice transferred to your savings account. Whether by direct deposit or automated transfer, you won’t spend what you don’t see in your checking account, so your saving will grow, and you won’t even miss the money that went into savings.

Using sinking funds to prepare for large recurring expenses. As much as I understand the emotion of dreading the expense of holiday spending, the coming of Christmas or Hanukkah is not an emergency. If you can see it on the calendar and track it year after year, it is not an emergency. That goes for homeowner’s insurance payments, car insurance payments, homeowner’s association dues, and property taxes, too. I won’t go into it here, but I have an entire article devoted to explaining sinking funds. Using a sinking fund takes the sting out of big expenses and allows you to continue to save money without skipping a beat.

Save Yourself

I know changing habits is not easy, but you can develop your own safety net by using the steps listed in this article. While you might be tempted to rely on your credit card to bail you out of an emergency, I urge you to trust yourself more than your credit card company. Save first, save regularly, and mind your spending. Soon you’ll be in the 41% of Americans who are comfortable with their savings. You will breathe and sleep easier knowing that you have a buffer between you and life’s curve balls.

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