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Ask the Experts – August 2018

Talking about money is important. However, for many reasons, a lot of people aren’t comfortable discussing money, finances, and budgets. Some people think it’s rude to discuss money. Others consider it a private matter while some don’t talk about money because they’re afraid of making a mistake or saying something wrong.

However, when you discuss money and finances, you learn and gain skills and knowledge that can help you improve your financial situation. This means that you’ll make better money decisions in the future. That’s why, each month, our financial experts answer questions about budgeting, money, and debt. If you have a question for our team, ask us online on Facebook, Twitter or through our website.

The questions here have been condensed or rewritten for clarity and simplicity.

I’m retired & living on my pension and government benefits. Do I need an emergency fund? If so, how much?

One of the main reasons for having an emergency fund is so that you do not have to go into debt if you lose your job or are unable to work for another reason. Since you are retired, this situation doesn’t really apply to you. You don’t have a job to lose and your income is relatively fixed each month. As long as you budget properly and don’t spend more than you take in, you should be fine financially.

However, another reason for an emergency fund is to deal with an unexpected expense. Life is unpredictable, and you never know what could come up. An appliance could break down or you could need to make a major repair to your car, if you drive a vehicle. If you don’t have an emergency fund, then you could up in serious financial trouble if you’re hit with a big expense. So, it’s still important to have an emergency fund.

Of course, typical guidelines for an emergency fund suggest that you have between three-to-six months of your income saved. You probably won’t need to save this much, since you’re living off pension and benefits. To figure out how much you should save, think about what sort of emergencies could happen to you. What’s the biggest unexpected expense that you could be faced with? Once you have an idea, try to save up this amount, plus maybe a little extra just in case.

In general, you’ll likely want to have a few thousand dollars saved for emergencies. However, it could take some time to save up this amount (depending on your budget) so start small and go from there.

I’ve heard you can have too much available credit and that it’s bad for your credit score. Is that true?

There’s no “magic number” for how much available credit you should have. There are a number of factors that go into the calculation of your credit score, including your payment history, the types of credit you have, recent credit inquiries, and how much credit you use compared to how much you have available.

In general, lenders like to see that you are using about 30% of the credit that is available to you. This shows that you are able to borrow a reasonable amount and repay it. Therefore, if you have $10,000 in available credit, you should try to keep your balances around $3000.

Having a lot of available credit could be a big temptation. If you’re the type of person who will eventually use the credit just because it’s available to you, then you may want to consider reducing the amount of available credit you have. Otherwise, you could find yourself borrowing more money than you are able to repay, since you have more credit easily available. This is a reason why lenders and credit bureaus do not necessarily like when someone has a lot of available credit. They know that this person is more likely to get into debt trouble since the credit is sitting right there unused.

If you decide to close a credit card so that you have less credit available, think it through first. Your credit history on a card is tied to that card. Therefore, if you have had a credit card for a long time, and you’ve always paid your bills on time, there’s a lot of positive credit built up in that account. If you close it, that history goes away with the card. This could hurt your credit rating. If you have a lot of credit that you are not using, you may want to call your credit card companies and ask them to reduce your limits instead of closing an account.