Your credit card is NOT your emergency fund

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There’s no need to look at the stats anymore: a lot of people in many countries can barely keep up with their debt, while many still have no ‘sign’ of an emergency fund. And, as you can imagine, when you’re more ‘uncovered’, bad things happen.

This makes some of them try to solve their emergency by getting into more debt or are keeping credit cards just for the sake of the rewards, swearing they’ll always be on time with the payments. Many of them won’t be able to, so this is when the INSANE interest kicks in and gets them even deeper into debt.

For someone who’s used to having all kinds of credit cards, living without them is something impossible to comprehend, even if there are still quite enough people who make ends meet, pay debt (if they have any) and save money without the need to ‘trust’ their future on a credit card.

emergency fund
emergency fund

PERSONAL SITUATION: We’re both debt free and are currently preparing for our child. We had to spend quite a lot to get ready (we chose to buy all the needed stuff step-by-step, by using all opportunities and sales), besides the regular expenses (from which the taxes and our small businesses expenses rank pretty high).

My husband’s side of the business is slowly picking up, so we’ve been living off one income – one income and a half for quite a while now. We’re also saving money for the birth (I’ll have to pay for it at a private clinic) and any other expenses. Each year we’re taking a 3 week vacation in Croatia (we’re already planning the next one for September), which again costs quite a biy.

Everything is covered with the money we earn from our businesses and, when needed, the savings. We both have debit cards, tied to our accounts with zero overdraft. We have never used credit cards and probably will never do so.

Husband is against any type of credit, while I had my share of misery with owing money, so no, thank you. While many struggle to understand how we can sleep at night, knowing that anything could happen and we have ONLY the money we earn/saved, we’re sleeping well at night, not having to worry about interest and other ‘goodies’.

S..t happens, so be prepared

I will NEVER advise anyone to think that life is all roses and unicorns, since it isn’t. Just when you think everything is running smoothly, life will kick you in the nuts and you’ll have to deal with the outcome. This is why I do think an emergency fund is VITAL and that, any money you can save, will clearly be useful one day in the future. It doesn’t matter where you keep your saved money: in a jar, in envelopes, in an account that’s easy to get to, whatever works for you. But DO SAVE money each month if possible, believe me one day it will be put to good use.

As long as you have stashed some money aside, you don’t need to rely on any lines of credit, because you already have something to rely on. I don’t care about interest, I don’t care to invest that money, I don’t even care where I keep it. What I want from this emergency fund is to 1. have it (and slowly increase its value) and 2. get access FAST, if I need.

You do need to understand that not all the things are emergencies

When you have a credit card (and can take money easily), you’re probably more inclined to be too ‘loose’ with spending it. I know for instance that we’re not that fast with spending our savings for any crap, because we do know that we have NOTHING else and we need to be careful. Sure, there are friends who could lend us some money or even our parents, but we’re clearly trying to solve our own problems.

When your car breaks, it’s clearly an emergency. When you have some health issues that need to be addressed now, it’s an emergency. The fact Macy’s has a sale is not.

Learn to really make the distinction between something that needs taking care of NOW and something that you’d like to buy/pay for.

My husband would like to have his own car (his old one doesn’t work anymore) and he could surely use one. Right now he’s using mine (not such a huge deal since we work from home and he needs it to go to clients (while I can clearly schedule my ‘trips’ at any other time) and he’ll probably do so for the next 3-4 years.

Could he get one now? I think we have enough savings for this and there’s always a bank willing to loan you money. But we’re OK right now, we have other priorities for our savings at the moment.

Sure, when his gas analyzer had to be checked, an unexpected tax paid or the car insurance bought for the next 12 months, we immediately allocated the funds and solved all these problems.

Wants are not needs

One of the biggest things we can do for our financial security is to learn how to live a good fulfilling life and yet not go overboard with our spending. We both have chosen few priorities (things that really make us happy) and are willing to spend more for them, while being frugal when it comes to the ones that really have no impact on our happiness.

It’s clear that, unless you’re a millionaire, you can’t really afford everything, but you can clearly set few priorities that make your life beautiful and will be able to fund them, while not breaking the bank.

But those rewards would be so cool

Many credit cards come with a lot of perks. If you’re VERY disciplined with your spending, know exactly how to ‘stretch’ your money and are always on time with the payments, you can clearly use some of the money you’ll earn or anything else that comes with the credit card.

The sad situation is that many of the people who use credit cards will eventually fall off the ‘I’ll pay in time’ wagon and then the interest rates absolutely smash them. When you’re paying over 25% (and more) just in interest, the 2% rewards are nothing, you’re bleeding money and quite seriously.

But what if your car breaks in the middle of nowhere?

We’re both travelers and have gone in many places. We took airplanes or drove our car to the destination. We always have cash at hand (enough to pay for few nights at a hotel, for some car repairs and even fly back home). Not to mention we never drive cars that we don’t trust (when husband noticed his car is not up to par for a 2000 mile drive, he decided to use it only in the city, where any issues can be solved in minutes). My car is still like new (5 years old, but in perfect condition and well taken care of), we always do the maintenance in time, have a spare tire and at least half a tank of gas in a big canister.

My husband NEVER leaves for a trip unless he knows that we have enough gas to take us at least few hundred kilometers. We also carry our debit cards (with access to well ‘stocked’ accounts) and can get more money in under 24 hours anywhere in the world.

The main difference between us and someone who’s use a credit card for this situation is that, once we get to a bank, we rely on our own money and don’t need the credit. We still swipe a card and get money off it, of course, unless the cash we have doesn’t get us out of the trouble.

Many credit card holders consider them to be a way to get some quick cash, when they need it. Sure, ideally, the money would be paid back in time and they’ll be able to enjoy life as before.

In our case saving the money covers us too, but without the stress of having to replenish the account in a set time. We HATE it when something happens and we need to get into our savings (aside traveling or buying some things we already budgeted for anyway), but at least we don’t have to hurry with paying back any money and we can re-stock the savings at our own pace.

So, if you asked me, we wouldn’t be too pleased to have to rely on a credit card to pay for any emergencies. By spending money carefully and making sure we always save, most emergencies that come our way can either be solved by the ‘regular’ cash-flow that month (fortunately not all will require a lot of money) or by taking some money from the savings/emergency account. We don’t plan for that money to earn us interest, we don’t care for rewards or anything, what it needs to do is to solve our problems the moment we need it.

What about you and your emergency fund? Do you still use credit cards to pay for emergencies? Have you started saving money aside so that anything that comes your way won’t need credit card funding? What works better for you?

27 COMMENTS

  1. I am just like your husband, apparently, since I am against any form of credit. It’s probably just how us, Romanians, have been raised… But it’s true that emergencies happen (in our case, they apparently happen on a monthly basis, ha) so a fund for them is the best option. Credit to solve these emergencies might be the only route to follow in some cases, but building your emergency fund will eventually save you from having to get loans to solve problems.

    • I’m just scared that, once we get into using a credit card, we’ll clearly get into trouble. So we’d rather save money and WAIT until we can purchase something ‘bigger’, then to risk anything

  2. I don’t agree with this for those who are not credit card debt free.

    Those who are in credit card debt, would be better off paying every penny they had towards that debt, and using that credit card if an emergency arises.. because frankly they’d be earning more interest savings by clearing a 19% credit card than stashing it in a 1% high interest savings account.

    They’d “earn” 18% more by clearing the card and not having to pay that interest than if they had $1000 or an EF sitting in a bank account.

    • Well, from what I read (and know), most of the people who use credit cards cannot get the ‘rewards’ and are paying up to 39% interest (I think it was the number posted in a forum, I almost fell off my chair when reading it). If you are VERY disciplined and can do it, then it might work, but in many cases it doesn’t happen and I have read about people who need YEARS to pay off their credit cards. Clearly not something I’d wish for myself or my family.

      • I agree if you’re in credit card debt you DON’T need an emergency fund. High credit cards balances with 20+% rate is an emergency that you should get rid of. What if something happens? You can always use the “funds” that you paid down ex: $1000 if you really need it. But that should be a last resort.

    • Wow, I’m glad you don’t advise people for a living. I can’t tell you the number of times someone has paid every dollar they had toward debt and then had an emergency….and was totally screwed if their credit card terms changed (which during the 2008 debacle happened often).

      The ONLY two safe ways to get out of debt are 1) to gather your emergency fund first OR 2) make sure nothing ever comes up while you’re paying down debt.

      So, I’d recommend getting an emergency fund. Your math only works if you can predict the future.

  3. Love, love, LOVE the title! So many people treat their credits this way, and then think they can just pay them off if they need to use it – without thinking that they would need to make significant life changes to do so. Planning ahead is always best!!!

    • I think that, even if you do rely sometimes on a credit card, the emergency fund should still be your priority. The moment it can take off some of the load, debt payment is easier and faster.

  4. I have a well stocked emergency fund but I would not be opposed to using my credit card when the emergency happens, then paying off the bill with my emergency fund. I’ve never missed a credit card payment, so I don’t worry that I’ll forget or put it off. And because I never pay that extra interest, the rewards are great.

  5. I haven’t had the misfortune of experiencing a true emergency yet, but if that is to happen, I may use my credit card to fund it. That said, I would only use credit if I had enough cash on hand to pay it off right away, reaping the 2% awards at the same time. I do agree that if someone is already in debt, they should not use a credit card as the emergency fund; debt can snowball and get out of hand quickly.

  6. Excellent article! I think there are definitely two types of people in the world: those who can’t have cookies at home and those who just need to be told to stay away from the cookies. For the vast majority of people (those who just shouldn’t have cookies in their house), sticking with cash-based systems is easily the best answer.

    • Well, I don’t know if we can have the cookies, but we clearly can do without. It easier for us to plan our future, knowing what we can rely on and what not.

    • Now that’s another problem. I know many people who are waiting for Black Friday as if it was the Second Coming. We’re just gonna ignore it, we have everything we need anyway

  7. You’re right – a credit card isn’t an emergency fund. I have an emergency fund should anything come up, but I would always (given the choice) put the emergency on my credit card first to get the rewards points, then transfer the money from my EF to my card right away. If you can be disciplined enough it’s a fool proof system.

  8. I agree. When I was young (1970’s/80’s) the conventional wisdom was to pay off debt before you begin saving. For many years, I didn’t have an emergency fund or even a retirement account, because I was always trying to pay off debt. Even a $500 or $1000 emergency account helps. Otherwise every emergency goes on the credit card, and it never gets paid off.

    • It’s a pretty tough decision to make: if you focus only on paying off debt (which is a good thing to do anyway), you can get into an emergency and you’ll be back to square one. If you save some money, you need to postpone a little the debt free date, but it would, ideally, help you get covered better in case of an emergency

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