When I discuss debt repayment or saving money in an emergency fund, the comparison is based on low interest rate costs.
The comparison is not based on high interest rate charges of 18 or 28 per cent charged on department store credit cards.
The higher the interest rate costs, the more it costs you in financing the debt.
I am a big fan of paying off debt and becoming debt-free. High interest card debt of nine, 18 or 28 per cent keeps the credit card companies rich and you poor.
The low interest rates of the past decade will not remain this low forever.
As the global economy strengthens, interest rates will increase.
Unfortunately, Canadian consumers are increasing their personal debt because of current low interest rates.
It is very tempting to buy a larger home, newer vehicle or the big screen TV when you can borrow at 3.5 per cent.
What happens when interest rates increase?
Some people lose their homes, lose their big fancy trucks and start to live pay cheque to pay cheque.
Many experts agree that an emergency fund should be your first priority as a base for financial stability.
Up to three months salary is considered a nice emergency fund.
An emergency fund provides peace of mind, and provides cash in an emergency.
Your emergency fund dollars should be parked in a high paying daily interest account.
You want to be able to quickly access your money with an access card, chequing options, or inter bank transfers. Do not leave money not needed in a bank account earning zero interest.
The TFSA is a good spot to place your emergency funds in. With the tax sheltered registered TFSA plan, any interest or gains earned is not taxable. The discipline of saving can be done in little steps.
You increase your net worth with every dollar saved. After you use your emergency fund, you will need to build it up again for the next emergency.
Lines of credit in addition to a mortgage may be the lowest interest rate you ever pay on debt. If you can get a line of credit based on the interest rate on a mortgage, example 3.5 or four per cent, then do it.
Replace high interest credit card debt of 28 per cent with a line of credit of four per cent. Get out of debt as quick as possible. You want to get a line of credit started before it is desperately needed.
You do not want to borrow money on unfavorable terms. Banks and credit companies want you to be of sound financial status before they lend you money.
You want to be able to access borrowed money at the lowest interest rate possible, and that is why it is important to get your line of credit set up as a safety net.
You should set guidelines on what your emergency fund is to be used for such as mortgage payments, rent, food, vehicle costs or insurance premiums. Impulse decisions to go on a vacation, a big screen TV or a home improvement should not be used from your emergency savings.
Now is a good time to get an emergency fund set up, then work to increase it.