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This year, with some very difficult investment decisions, I'm paying of my credit card balance again. Last year at this time, I had the the balance down to zero, and planned to keep it that way. What happened?

First, my wife's car needed new brakes, not just shoes, but wheel cylinders, rotors, etc. One day she was driving, and the brake light went on and the brakes started to go. We had to have the stupid thing towed, and repaired in a shop. That was about $600. Then the Foolmobile (225,000 miles) had to have the radiator and heater core replaced. Then its brakes went, again the whole shooting match, went out while I was driving (fun). Refrigerator died... You get the picture.

Once you start charging, and can't pay off the balance, which I could not do with a couple thousand on the cars in a month, the cash flow goes down. Then, you have to charge other things. It keeps getting worse, and next thing you know, you are in mucho debt again.

The lesson is the importance of a cash reserve for emergencies (and not keeping old cars that have unplanned repairs, and can be dangerous). I am going to take a hit tax wise and other costs in cashing in investments, but it calculated to be better than leaving the debt on the card. If I had built up a cash reserve, and dumped the stupid cars before they were so unreliable, this wouldn't have happened. Don't get emotional about a car enough to give it a name like I did.

I used to sneer at the rule of thumb about a 3 to 6 months salary cash reserve. I don't anymore. If not 3 to 6 months salary, you still need a cash reserve to cover the usual unplanned expenses.
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