Credit card ≠ emergency fund

The other day I read a really bad article on Forbes by Tim Worstall sensationally titled “It’s Simply Not True That Most Americans Don’t Have $1,000 In Emergency Savings.” His basic argument is summed up in this paragraph:

…credit and savings are economically the same thing. They’re both ways of gaining access to emergency funding. That one is not consuming now so as to be able to consume in an emergency, the other not consuming in the future to be able to consume in an emergency makes no difference economically.

It’s very hard to understand Mr. Worstall’s point of view here, but in the real world saving money versus borrowing money for an emergency are two very different things. If I saved $100 a month over ten months I would at least be earning some interest, and foregoing $25 a week is a minor sacrifice. If I had to pay back a $1000 loan over ten months, I would accrue a good deal of interest depending on the source (credit card, payday loans, mafia).

Another reason why saving is preferable to borrowing is that going into debt exposes you to additional volatility by making you depend on your future actions. Imagine, if you will, that you are in a sense three “selves”—a past self, a present self, and a future self. To save money is to forego consumption in the present in order to benefit future!you. To borrow money is to put a burden on future!you in order to be relieved of a present burden.

If you got into an accident and had to save money, you would be depending on past!you. Past!you is a dependable guy. Maybe he made some mistakes, but you generally know what’s up with him. Depending on future!you is risky. Future!you is an unknown. Maybe good things might happen to future!you, maybe bad things. Depending on future!you will expose you to additional risk of harm from volatility, and what is an emergency but one result of volatility? (For further reading, read the works of Nassim Nicholas Taleb.)

Of course, there are some people who manage to game the system and effectively utilize credit cards. The Planet Money episode The Art of Living at the Poverty Line features a woman who takes advantage of zero-interest credit card deals and managed to fund a weekend vacation for herself and her son despite making only $16,000 a year. These people are outliers, and we should not deduce general principles from them. Rather, to say that it’s okay for people to not have an emergency fund because they can borrow is like throwing gasoline onto the fire of debt burning up the earnings of millions of Americans.

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