Step away from the credit cards!

Dear Dave,

One of my credit card bills was turned over to a collection agency, because I was late making payments several times. The agency has offered me two or three different payment options I can afford. If I agree to one of these, does the original creditor get paid, as well?

Bethany

Dear Bethany,

You’re facing one of two possibilities. The collection agency is either directly representing the credit card company, or it owns the debt outright. Neither way of handling it is unusual when someone has defaulted on a loan.

Here’s the deal. You’ve already got a mark against you on your credit report for the bill being turned over to collections. So, at this point settling on a credit card you’ve defaulted on is really no big deal. Unless you have the cash on hand right now to make good on the debt outright, I’d accept whichever deal makes the most sense for you financially at the moment.

But if you want my very best piece of advice for you, and anyone else finding themselves in this kind of situation, Bethany, it goes something like this. Stop using credit cards!

Dave

The unexpected is always lurking

Dear Dave,

When I leave my job in two or three years, I’ll still have a good income of around $80,000 thanks to my pension. I talked with my wife recently about us not needing an emergency fund with a continuing steady income like this, but she thinks we should still have money set aside strictly for emergencies. I think we would be fine with my pension and our other investments, but she says a fund set aside strictly for the unexpected would make her feel safer. What are your thoughts?

Barrett

Dear Barrett,

I always recommend folks have an emergency fund of three to six months of expenses. Put it in a good money market account with check writing privileges and a decent interest rate. That way, your money will work for you a little bit until it’s needed.

I know a good pension can feel really solid. But there’s always the possibility of lost income or very large, unexpected expenses. Life can take a big financial chunk out of you at any time. What if one, or both of you, have a major medical event? Even with the other investments you mentioned, you should have an emergency fund. Period.

In your case, you could probably lean toward three months of expenses in your emergency fund. If it were me, I’d go ahead and make it a full six months of expenses. Trust me, a fully funded emergency fund will make both of you feel better. It can turn a disaster into nothing more than an inconvenience.

Dave