Money Management

Dave Ramsey believes it’s a bad idea to use credit cards for emergencies. Here’s why he’s right. 

Most people make at least some mistakes with their money, but you can avoid a lot of these errors in advance if you know what the common pitfalls are.

According to finance expert Dave Ramsey, there’s one particular mistake many people make that ends up making a bad situation even worse. Here’s what it is, as well as some advice on whether this error is really as bad as Ramsey says.

This is the money mistake Ramsey warns about

According to Ramsey, the big mistake many people make with their money relates to how they prepare for surprise expenses. That error: Planning to put emergency expenses on a credit card.

“If getting rid of those credit cards freaks you out because you use them ‘for emergencies,’ then it’s time to come up with a new plan,” Ramsey said. “Borrowing money for emergencies only leads to more debt and stress.”

Instead of using a credit card when unexpected costs come along, Ramsey instead urges putting money in a high-yield savings account for emergencies. He advises starting with a $1,000 emergency fund, and then eventually saving up enough to cover between three and six months of living expenses in your emergency savings after you’ve paid off all your debts.

Should you listen to Ramsey?

Ramsey is wrong when he says you should get rid of your credit cards, as they can be a useful tool that enables you to earn rewards and build credit.

But, he’s correct that credit cards are not good for emergencies. If you experience a bump in the road like a drop in income or a surprise expense, the last thing you want to do is be forced to go into credit card debt to deal with the situation.

If you didn’t have the cash to cover the emergency in the first place, chances are good you wouldn’t be able to pay off the bill before the statement comes. This would mean you’d get stuck paying interest on your credit cards. Adding interest charges makes these costs you weren’t prepared for even more expensive — which isn’t what you need when you already couldn’t afford them.

You’d also be stuck with that monthly credit card payment going forward, which also makes your situation worse. You’d have an additional monthly payment when you were already unable to pay for the surprise cost.

Adding this financial stress on top of the stress of whatever emergency you had isn’t going to make your situation any better — and it’s more likely to make you unable to afford other surprise expenses going forward, thanks to the fact you’ll still be paying off your old bills.

So, if you can, you should absolutely prioritize saving an emergency fund so you don’t find yourself in this situation.

If this isn’t possible, though, then a card with a 0% introductory APR could be a good option if you can pay it off before interest comes due, because at least that way you can borrow to cover your emergency without incurring interest expenses. This shouldn’t be your first option for emergencies, but in a pinch, it’s not the worst one despite what Ramsey might think.

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When you are buying a vehicle, Dave Ramsey suggests avoiding taking out a car loan or, if you must, paying it off ASAP. Here’s why. 

Buying a car is a major purchase. You want to make smart financial choices during the process. Dave Ramsey recommends one particular method of buying a car that he believes can save you a lot of money and hassle in the long run.

Here’s what Ramsey suggests.

Dave Ramsey recommendation for buying a vehicle

Ramsey’s suggestion for buying a car the right way has to do with how you pay for your vehicle.

“If you want to save yourself a financial headache, skip GAP insurance and buy a used car with cash in the first place,” Ramsey said. “If you already have a car loan, make it your goal to pay it off as quickly as possible so you can drop the GAP coverage and lower your premium.”

Ramsey is making this recommendation both because paying cash for a used car allows you to avoid car loan payments and it enables you to avoid having to purchase GAP insurance, as he mentioned.

GAP insurance is a type of auto insurance that covers the gap between what you owe on your car and what your vehicle is worth (as the name suggests). Often, a car ends up being worth less than you owe on it — especially if you bought a brand new vehicle that loses a lot of value right away, or if you didn’t make a large down payment or took out a car loan with a long payoff time.

Insurers pay fair market value if your car is totaled, but you’d have to pay off your full loan amount even if it is a larger amount. GAP insurance would pay the difference between the insurance check you get and your outstanding loan balance.

Should you listen to Ramsey?

Ramsey’s suggestion to buy a used car with cash instead of getting a car loan can make a lot of sense — if it is feasible.

Avoiding a car loan does save you a ton of hassle. You won’t have to go through the process of applying for a car loan or negotiating financing with your dealer — you can just bargain based on the price of the vehicle. You also won’t have monthly payments to worry about and won’t have to buy GAP insurance.

Cars are also depreciating assets, which means they go down in value after you buy them. It doesn’t make a lot of sense to borrow for an asset that doesn’t go up in value since you lose money on interest even as your asset becomes worth less.

So, if you can take cash out of your savings account to pay for a used car, then you should do it. But, for many people, this is not a possibility. A car is often necessary to get to work or fulfill family obligations and you need one in good condition. If you have to borrow to make that happen, then following this advice is impossible.

If you do need to borrow, then you should absolutely make sure you have GAP insurance to avoid having to pay off a balance on a totaled car. And, you may also want to drive your vehicle as long as you can after paying off your car loan while saving up to pay cash for your next vehicle, so following Ramsey’s advice will be possible for you in the future.

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The stock market tends to swing wildly in the short term. Here’s what you need to know about the coming months — and how to cope with volatility. 

It would be more than fair to say that 2022 was a tough year for investors. Many people saw their IRA or brokerage account balances take a hit last year as stock market volatility reared its ugly head.

Meanwhile, in a recent Country Financial survey, 41% of Americans said stock market volatility has impacted them to some degree. And unfortunately, we could be in for many more months of upheaval before the stock market settles down.

Why 2022 was so rough — and why 2023 might be a repeat

There were a host of factors that caused the stock market to be extremely volatile in 2022. For one thing, consumers spent the entire year grappling with rampant inflation. And that led the Federal Reserve to get aggressive with its interest rate hikes.

Interest rate hikes are problematic for consumers because they tend to indirectly drive up the cost of borrowing, whether in the form of a credit card balance or personal loan. But also, the fear last year among many financial experts and consumers alike was that aggressive interest rate hikes on the Fed’s part would lead to a massive pullback in consumer spending — a decline large enough to fuel a recession. And there’s nothing like the fear of a broad economic downturn to send stock values plummeting.

Unfortunately, though, today’s circumstances aren’t all that different from 2022’s. Inflation is still a big problem, even though it’s cooled since last year. Consumer borrowing is still very expensive. And there’s still the potential for a recession to strike — though to be fair, some experts have scaled back their warnings a bit.

What this means is that 2023 has the potential to be another volatile year for stock investors. And so the best thing to do is try to think long term, and worry less about week-to-week fluctuations.

It’s all about the big picture

Whether you’re investing in a brokerage account, an IRA, or another account, ideally, your plan should be to load up on quality stocks and hold them for many years. And if that’s your approach, then it should actually make you more comfortable with the idea of short-term volatility.

The stock market has long been subject to wild swings, so the events of the past year are really nothing new. And if you have a decades-long investment window, the reality is that near-term volatility shouldn’t bother you or cause you to lose sleep.

This isn’t to say that it’s fun to see your portfolio balance decline. Obviously, no one wants that. But it’s also important to keep reminding yourself that investors who take a long-term approach to buying and holding stocks tend to be rewarded. So rather than let ongoing market volatility negatively impact you, do your best to ignore it.

In fact, a good bet is to not check your portfolio balance more than once a quarter. The less you peek in, the less stressed you might end up at a time when the market has yet to really settle down.

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Having an emergency fund gives you financial protection and peace of mind. Read on to see what you should ask ahead of tapping that money. 

A solid emergency fund is one of the best ways to protect yourself against surprise expenses, and it’s essential, because life can throw a lot of costly problems at you. These can range from the relatively small (like the $375 bill I got from the auto mechanic this week — thankfully, my old car’s wheels haven’t yet fallen off) to the potentially catastrophic, like a job layoff.

Having a stockpile of cash available to you in an emergency (ideally, enough to cover three to six months’ worth of bills) can save you from needing to go into debt if you need money in a hurry. Here’s what to consider before tapping your emergency savings.

1. Is this an unexpected expense?

Some expenses that could seem like emergencies can actually be planned ahead for, so it’s important to know the difference between these and a truly unexpected emergency bill. If you intend to buy holiday gifts for your kids, for example, that is an expected expense, and it’s not a good idea to tap your emergency fund to cover those costs. A better move would be to start putting extra cash aside in your savings account a few months before the holidays, so you’re ready. Similarly, if you know your car is due for new tires soon, that’s also not unexpected.

An unexpected expense could be a bill for your health insurance copay for a recent emergency room visit, or covering your auto insurance deductible if you get into a fender bender. If you’re laid off from your job tomorrow and need a way to cover your bills until you get a new job, that’s also definitely a reason to use your emergency fund.

2. Do you need to pay for it now?

Personally, I hate it when I owe money on a bill and I can’t pay it right away. But it’s also important to note the difference between an urgent expense and something that can wait. You might know that your air conditioner is coming to the end of its useful life and could break at any time, but it’s a better idea to try to save up money for a replacement ahead of time instead of just covering the cost from your emergency fund immediately. If the air conditioner breaks before you’ve got all the money ready for a new one, that’s an emergency fund situation.

3. Can you pay for it another way?

Let’s say you need to pay that bill right now, but rather than immediately tapping your emergency fund, consider other ways you might have to cover it. After all, it’s best to leave your emergency savings for when you have no other option, or are faced with covering a lot of expenses (like your bills if you get laid off from your job). Your car needs new tires now. Can you use a 0% APR credit card to cover the cost, then pay off the charge before you accrue interest? Did you just get your tax refund and can dedicate part of it to the tires instead of tapping your emergency fund?

4. How soon can you repay yourself?

While answering this question may not help you decide whether to use your emergency fund, it’s still worth considering. You don’t want to drain that money and leave yourself unprotected against future emergencies, so whenever you spend some of it, make a plan to repay it as soon as you can. This might mean taking on extra hours at work, if possible, or cutting back on a few discretionary expenses until your emergency fund is back where you need it to be.

Building an emergency fund is one of the kindest things you can do for your finances and your peace of mind, so make sure you only use that money for its intended purpose — and pay it back promptly when you do, so it’s there for you again next time you need it.

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When you stop paying your mortgage, you risk losing your home. Read on to see what to do if you can’t pay. 

A mortgage is a binding agreement between you and a lender. In exchange for loaning you money to finance the purchase of your home, you agree to pay your lender a specified amount of money on a monthly basis. If you fail to keep up with those payments, you could end up having your home foreclosed on.

The good news is that a single missed mortgage payment won’t send you into foreclosure immediately. But a series of missed payments could. So if you’re struggling to keep up with your mortgage payments, the most important thing to do is reach out to your lender and see what options you have.

How the foreclosure process works

Once you’re 30 days late with a mortgage payment (or any other loan payment or bill, like a credit card payment), you’ll be reported as delinquent to the credit bureaus. That means your credit score could take a huge hit.

A single late or missed mortgage payment won’t mean you’re getting foreclosed on, however. Rather, the legal foreclosure process usually cannot begin until you’re a full 120 days behind on your mortgage, according to the Consumer Financial Protection Bureau. From there, once your lender begins the process of foreclosing on your home, the amount of time it will take will vary by state.

But clearly, you don’t want things to get to that point. After all, if you worked hard to save money to buy a home, losing it would be devastating. But there may be steps you can take to prevent a foreclosure, even if you reach a point where you can’t keep up with your monthly mortgage payments.

Talk to your lender as soon as possible

You might struggle to pay your mortgage after losing a job, getting injured, or another circumstance. No matter the situation, your best bet is to get in contact with your lender as soon as possible and discuss your situation.

See, lenders don’t actually like foreclosing on homes. The process can be lengthy and expensive for them, and generally, they’d rather just continue to collect your loan payments, even if it means having to wait a little longer to get their money. As such, if you reach out to your lender, you may find that you’re able to pause your mortgage payments for a period of time and resume them later under a process called forbearance.

Your lender might also allow you to modify the terms of your mortgage to make your payments more affordable. For example, if you’re currently on the hook for $1,200 a month and you can no longer swing a payment that high, your lender might agree to let you stretch out your repayment period, which might lower each monthly payment to $800 or $900.

All told, there may be options available to you if you can’t pay your mortgage, so don’t stay silent and just stop making your payments. Reaching out to your lender could prevent you from losing the home you worked hard to purchase.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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