Should You Use a Credit Card As Your Emergency Fund?

Over the years, tons of readers have written into me with some variation on the same question: is it appropriate to use my credit card as an emergency fund? Here’s a sample of that question, from Eddie:

I guess what I’m asking is, if I have such a large credit limit that’s not being used, why don’t I just use that as an emergency fund? If the odds that I’m going to ever use it are fairly rare, why should I just keep cash in a savings account when I could be investing it and earning more with it elsewhere?

This is a pretty common situation, actually. People often view their credit cards as their emergency fund – if something happens, they can just throw it on the plastic and take care of the bills later. Most of the time, this scheme works like a charm: it’s easy to utilize this method to handle a lot of simple emergencies like cars breaking down and so on.

Here’s the problem, though: the purpose of an emergency fund is to reduce your personal risk. However, using a credit card for that purpose actually adds significant risk to the emergency fund situation. Here are some of the risks that you face when using a credit card as your emergency fund:

The “size” of your “emergency fund” is at the mercy of the credit card companies. Credit card companies can change your credit limit on a whim. Miss a few bills? Credit card company tightening their belts? The end result of such events can often be a credit limit tightening – and that means you’ve just lost a big chunk of your “emergency fund” right at the moment you need it.

The interest rates can be painful. You lose your job, so you start using that credit card to buy groceries and gas. Eventually, you rack up $5,000 in debt or so on the credit card. Then, you get your job back – but that debt’s not easy to repay, especially at a 19.9% interest rate. Your minimum payments each month are in the hundreds and that just covers the interest and a tiny chunk of the principal. By the time you repay all of it, you will have paid thousands in finance charges. In short, for real emergencies that require a lot of money, the credit cards will bite you hard.

You’re exposed to Murphy’s Law unnecessarily. Using your credit card as an emergency fund opens you up to lots of other avenues of minor risk as well, each of which can bite you when a real emergency comes along. Identity theft is one potential risk. Card use is another risk – the moment at which you need it for an emergency might be a moment when you’ve used it for something else.

A cash emergency fund stowed in a savings account has substantially less risk than the credit card option. It’s safe, secure, and won’t suddenly disappear on you.

There are two big arguments I’ve heard against using a cash emergency fund:

It’s hard to save up that much money. If you want to have six months of take-home in your emergency fund, you’re going to have to save seriously and diligently for a long time. With the credit card “solution,” you can have the card in hand very quickly. This convenience causes many people to justify using the credit card.

If you find yourself in this situation, using a credit card because it’s hard to save up that much cash, your best solution is to establish an automatic savings plan to build up that cash emergency fund on your own. Obviously, if you’re in a situation where your emergency can really only be handled by a credit card, you’ll have to use it, but you should not choose to remain in that situation over the long haul. Take action to make your situation safer – start an automatic savings plan to sweep some cash from your checking account to your savings account automatically on a regular basis.

A savings account doesn’t earn very well. Others look at the cash held there as an investment and thus argue that it should be put into something that has a greater potential for earnings. The argument against this is that an emergency fund is intended to be both stable and liquid – you can always access it and it doesn’t unexpectedly lose value. If you were to invest this cash in other resources, like stocks, you would lose stability and also perhaps lose some of the liquidity (depending on how you invest it).

My suggestion here is to consider your emergency fund to be the cash portion of your overall portfolio – it’s the steady and stable part of things. This allows you the freedom to seek out other investments that are perhaps more aggressive than you might otherwise consider, like stock investing in developing countries.

Here’s the take-home: a cash emergency fund, stowed away in a savings account, is as safe and secure as you can possibly get, which is exactly what you want from an emergency fund. If you’re in a situation where you rely on a credit card for your emergency fund, you need to start transitioning away from that – try an automatic savings plan to gradually move cash from your checking account to your savings account.

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  1. Michael says:

    My cash is for emergencies, but before I spend cash I put unplanned expenses on credit cards. This roughly doubles my fund in a big emergency, and in a small emergency I can “wait and see” with my money for about 30 days and still pay off the card with no interest.

    Also, I don’t pay anywhere close to 19.9%. I pay a rate, when I absolutely have to, that is very reasonable for the flexibility.

  2. Johanna says:

    I think the key question to ask is, “If the worst that could reasonably happen happened, would I still be OK?” If you lost your job, your credit card company slashed your credit limit, and the stock market dropped sharply in value all at the same time, would you still be able to get your hands on enough money to pay the rent and buy food for six or more months? If so, then sure, what you’re doing is appropriate.

    Of course, it’s always possible to imagine circumstances under which you’d be up the creek without a paddle, but that’s true no matter what you do with your emergency fund. That’s why it’s important to distinguish between what could reasonably happen (e.g. what I described above) and what’s vanishingly unlikely to happen (e.g. the collapse of capitalism as we know it). Your emergency fund needs to protect you from the former. If the latter happens, you’ll be in trouble, but so will pretty much everybody else.

  3. Amber says:

    My credit card is a small portion of my emergency portfolio. If something were to happen, I can use it while I wait for my cash to come from my online savings account (with the 2-3 day turn around, longer on weekends). For example, if a tire blows and I don’t have the funds to cover it in checking (I keep my checking fairly empty, because seeing a balance in there is a license to spend for me), I can replace the tire on credit and just pay it back off when the transfer completes. Keeps me from having to drive on a donut for the 2-3 days.

    So basically, I use the credit card as an emergency fund’s emergency fund. Just to close the transfer gap.

  4. Cathy says:

    Don’t do it. BAD idea. 2000 I had zero debt, and zero savings. 2001 I lost my job and started using my credit cards to pay for bills and food. By 2003, I had $35,000 in credit card debt. I kept using it because I kept thinking the next job was right around the corner. The job I ended up getting paid significantly less than my previous job. I was stuck with that job for about 5 years while I paid off that debt, too afraid to look for a new job. Credit card companies want you to be trapped and encourage you to be a debt slave this way. Don’t play their game. When you have zero debt and money in the bank, you’re the one in position of power. When they own you through debt, they win.

  5. mel says:

    We still have one CC open after going through FPU with Dave Ramsey. I cannot let it go. We’ve got +20K saved up right now in our EFund. The CC we’ve left open is the land of last resort. I don’t ever anticipate having to use it. (We do use the Clark Howard plan on it- use it once every 6 months for a cheeseburger, pay it off and be done with it.)

  6. Matt says:

    I think that having a cash-backed credit card wouldn’t be a bad thing. The way Eddie asks the question, it makes it sound like he has the liquid money available and it can either languish in a savings account, or possibly earn more in something else. The credit card provides immediate access to funds, then the cash (that may take longer to get to if it’s in a high-interest savings account online, or some other investment that may take a few days to get access to) can repay the charges.

  7. liv says:

    Yeah, use a cash emergency fund. If you can pay with a credit card, that’s fine, but you really should have the money to pay that back and not suffer massive interest rates.

  8. Wendy Steele says:

    Who pays a 19.9% interest rate?

  9. Dave says:

    It depends on the definition of “emergency.” If your job is secure (hard to come by in this economy), then using a credit card would be fine. For most people, racking up debt after you lose your job is probably the worst thing you can do, though.

  10. Moneymonk says:

    People think cash is an investment because it’s in an account. Cash is for emergencies That’s it.

    I haven’t had a credit card in 13 years, and don’t miss it.

    Had emergencies and made it through with cash

  11. lutton says:

    Don’t forget your asset allocation priciples: you should be keeping some money invested in liquid or nearly-liquid assets even in your 20’s. And the ratio should get bigger as you age. So keeping some ‘cash’ around as your emergency fund should be able to fit into your investment plan anyway.

    If that percentage of your total investment pool is not enough of an emergency fund, then perhaps a credit card might be useful to cover some expenses in a crisis, giving you time to liquidate other assets.

    But remember, if you need to liquidate at an inopportune time, you could easily lose money. That’s why having some liquid assets should be part of any investment strategy.

  12. Melody says:

    To go along with #2, also remember the old saying ‘bad things happen in 3’s’. I’ve found that to be oddly true in my life. If the first bad thing is causing you to dip into the emergency fund, there’s no guarantee the next thing won’t! I’d say #1 has it right – don’t put more on your CC than is in your cash emergency fund, unless it’s an absolute last resort. That way, you can get the benefits of building credit and securing your purchase (if it’s something you could need to dispute or return) without being suddenly a slave to the company.
    Also, as for leaving CC’s un-attended, that’s a sure way to get your available balance cut. I had it happen on two of mine because I also didn’t activate the new cards when they came in the mail.

  13. Tara says:

    I agree that a credit card is NOT the way to plan for emergencies and I also agree that it would nice to see the actual money you’ve stowed away do something besides just setting there. Solution: I opened a high yield interest checking account. To qualify I have to have at least one direct deposit, get my back statement electronically and make at least 10 transactions with my debit card. It has been easy for me because this account replaced my main bank account and to keep the emergency fund money separate for the rest I use MS Money software give it a different name. So even though it’s physically in one bank, I know the two different amounts so I don’t spend it. check out checkingfinder.com for more information.

  14. NYC reader says:

    An emergency fund is just that, A FUND. Not a credit line. It’s a pool of liquid assets to be used only for unplanned and extreme situations.

    It’s a savings pool, not an investment pool. You should have zero risk on your emergency fund.

    The usual recommendation is about six months of living expenses. But the entire fund does not have to be in a savings account earning next to nothing. It can be a tiered series of resources which you tap into as required.

    For example, let’s say your living expenses are $3000/month. That’s mortgage or rent, insurance, utilities, food, transportation, school supplies for the kids, pet care, ordinary medical costs such as regular prescriptions, everything. I can see why someone wouldn’t want to keep $18,000 earning next to nothing in an ordinary savings account.

    Keep one or two months in cash in a local bank or credit union savings or money market account. There will be zero delay in accessing your money; all you need to do is hit an ATM, write a check, or make a withdrawal at a branch. Keep the remainder in other higher-yielding and/or more restrictive SECURE savings vehicles. A stack of savings bonds (which can be cashed at any bank). An online savings account such as ING, which might take 2-3 days to be transferred to your checking account. A 6 month to 1 year CD (which can be cashed out with a penalty and loss of interest).

    The credit line on the card is simply used to make the initial payments in your emergency, e.g. the $2000 in the emergency dept of your local hospital, the $5000 payment to the heating contractor for a new furnace, etc. The emergency fund is used to pay the credit card bill in full when it comes due.

    If the credit card company suddenly cuts off your line of credit (or the bank kills your home equity line), you’ll still be ok, because you will have ready access to CASH.

    If your emergency is a job loss, the cash in your tiered emergency fund will augment your unemployment, or it might pay your health insurance under COBRA, until you find another job.

    If you rely on the credit card as your emergency fund, you’ll end up with the $35,000 debt situation that Cathy described.

  15. Elisabeth says:

    You bring up some very good points to consider. The only one I’d disagree with, though, is when you say “Card use is another risk – the moment at which you need it for an emergency might be a moment when you’ve used it for something else.” If you were using cash instead of a card, you would be no better off in a situation where you needed your emergency fund, but you had just spent it on something else. In fact, in that case, (if it’s a true emergency) it might be easier to get a(nother) credit card than to magically come up with more cash.

    But still, the one thing doesn’t outweigh your other points.

  16. Jen says:

    Would it ever be a good idea to use your retirement savings to cover an emergency expense? Say you had $10,000 in savings, but lost your job and then had a major medical expense in the mid-high five figure range. What would be the best thing to do in this situation?

  17. Frugal Dad says:

    For a period before I had a fully funded emergency fund I financed small emergencies on a credit card and paid them off over a few monthly payments. It was a dangerous place to be, because as Trent points out, my emergency fund was limited by the generosity of the card issuer!

    I still use the credit card to handle emergencies for rewards, convenience, and purchase protection, and simply pay it off from my emergency fund when the bill arrives.

  18. Courtney says:

    If you are not smart enough to realize why it is important to keep an emergency savings account in cash, you are probably not smart enough to make worthwhile investments.

  19. Vicky says:

    I would not use credit in an employment emergency, but in a natural disaster, sure. A credit card with a healthy limit has been very handy as we’ve been rebuilding from Hurricane Ike. Most of our non-building expenses have been covered by insurance on a reimbursement basis and having the credit card statement to reconcile against really helps streamline the paperwork. It has also saved us a good deal of unnecessary inconvenience: a 45 day stay in a hotel leads to seriously large holds on your account and that would have been a real hassle if we’d used a debit card. It’s a very specific definition of “emergency” but worth considering.

  20. ChrisB says:

    I agree with your analysis and advice Trent. The “unfortunate” thing is that with savings account rates as low as they have been for some time, together with inflation rates where they are and may be in the future, emergency funds are going to have to be added to on a regular basis to ensure that they stay at the “x months” worth of living expenses.

    I’m also intrigued by NYC reader’s ideas on how to use other zero-risk resources; the only problem I see in that instance is the possibility of an emergency with a cost which surpasses one month’s worth of expenses… if, for instance, someone uses a cd ladder for their emergency fund, they may not have access to their money (penalty-free) as quickly as they might need.

    Besides, many cds are still returning lower than inflation lately.

    Having said that, I still agree that an emergency fund must be in cash or similar risk-free investments… I don’t know of a solution to the inflation problem other than regularly “topping off” the EF.

  21. Elisabeth says:

    Also, I think the real question is – how does this question relate to toilet paper? ;) (Just kidding…)

  22. Diane says:

    I think it’s important to have a cash emergency fund. While I was building my emergency fund I considered my credit cards as my “emergency back-up”.

    Now I use my credit cards & pay them off every month. If I have an emergency expense I might put it on the credit card and if I can’t pay it use money from the fund at the due date.

    Some minor things I can just pay the credit card out of the next month’s paycheck without going into the E-fund.

    In case of real EMERGENCY where banks fail, or credit card companies stop functioning temporarily I have an actual CASH fund at home in a waterproof/fireproof box.

    When we had to evacuate quickly for Hurricane Katrina I was glad to have CASH handy to leave. Now I have an ING savings account and I’m planning to open an ING checking account with a debit card so I could access savings quickly in a real emergency from anywhere.

  23. Krista says:

    I actually think a CC is an important component of being ready for emergencies.

    Think about it: your ING account is liquid, but can you access it in the middle of the night when your house burns down? No. You need a credit card as a bridge until you can access your saved money.

    If you follow that thinking, the credit card can allow you keep your EF money in something that is still very stable, but higher yielding than a simple savings account. You can transfer some or all of your EF into GICs with rotating maturity dates because you can use the CC *interest free* every 30 days.

    Do make sure that the credit limit is in line with how much you actually have saved, but I say, in an emergency use every tool at your disposal.

  24. Brent says:

    I think a credit card can be used as PART of your safety system. Cash is a necessary part credit is not. I for example have a 3 months typical expenses in cash, but beyond that requires tricks.
    I pay everything the day the bill arrives(online automatically). If I extended some of those to pay when the bill is due I’d have another bit of time. I also pay ahead on some things like auto insurance 6 months ahead of time. If that payment came around again I could reduce the policy and also pay monthly. After cutting back expenses from typical to the bare essentials and by using credit and payment leniency as a short term extender that 3 months can mean survivability for 6 months. If you are closer towards the bare essentials and already pay when due and not when arrived then having the cash easily accessible is more important.

  25. Jimbo says:

    I have the vast majority of my money in investments. I always have credit cards with 0% balance offers ready to sign up for in case of an emergency. Even though times are bad, there are tons of such deals out there – I can’t bear to have $10,000+ sitting in an account earning 2% interest when stocks are on huge sales as they are right now.

  26. Marc says:

    Great article, just one more thing I would add:
    If you live paycheck to paycheck, have zero credit card debt but zero emergency fund – using a credit card for any emergency means you’ll have to give up something else to pay it off. That’s a mathematical certainty.

    Put another way: If an emergency arises and you put it on a credit card, you have approx. 30 days to pay that off until it starts to cost you interest. For a car repair or dentist bill (perhaps thousands), most people can’t muster up that kind of money within their monthly income, so the balance will be carried at least a little bit.

    If not in an account, the emergency fund can be in a redeemable CD that can be used to pay off the credit card at any time.

  27. I disagree. Trent, do you really feel safe knowing you are gradually losing your emergency fund to inflation? Honestly?

    “It’s safe, secure, and won’t suddenly disappear on you.”

    No it will gradually disappear instead. I love this article from wisebread:

    http://www.wisebread.com/security-is-an-illusion-freedom-is-real

    There is no such thing as security, security can’t come from an emergency fund it can only come from yourself.

    If you must have an emergency fund, I say stick it in a CD ladder system, then you’re only losing 1-2% as opposed to 2-4 % in a normal savings account.

    -Nate

  28. Steve says:

    I don’t think using a credit card as your emergency fund is appropriate just so you can invest that money in stocks instead. That’s awfully risky and will almost certainly hurt you (e.g. cost you money, or take away your paddle altogether) when you actually need to use the fund. An e-fund should be in a cash or cash-equivalent, guaranteed safe account. Keep in mind that over time, the e-fund should become a smaller and smaller part of your overall net worth. Also, the returns of an e-fund come not in what it earns you when you aren’t using it, but what it saves you when you have to use it!

    There is one situation where it may be appropriate to use a credit card as an emergency fund, and that’s if you’re already in high-interest credit card debt and trying to pay it off. In that case I think you are only slowing yourself down if you put a bunch of money in a low-interest savings account while keeping a bunch of debt accruing high interest. Still, this is one of those “do what works for you” situations – if having an e-fund helps you sleep at night, that’s fine. Ditto if, say, struggling to build up a small cash cushion later gives you the willpower to not define a laptop sale or vacation opportunity as an “emergency.”

  29. Another good article Trent… there are so many arguements about the mechanics of an emergency fund and you do a great job of debunking some of the big ones here.

    To most of these arguements there is a logical and considered answer, and there is also the Wilford Bremly answer – “It’s the right thing to do”.

    One thing I’d add is to size your emergency fund based on expenses rather than income. Monthly saving plans or snowball payments are ‘extra’ and we shouldn’t plan to replicate these outlays in an emergency situation. In many cases that will significantly reduce the amount required. Speaking from my own experience, once I started knocking out my debt my ‘extra’ grew and grew while my required expenses continued to get smaller and smaller. Now that I’m in a buyout situation I’m able to stretch those funds much longer because I’m focusing only on required expenses.

    Thanks again for the good read as well as the opportunity to join in on the discussion.

  30. NYC reader says:

    @Chris B

    I’n not advocating that the emergency fund be all in one type of vehicle (e.g. CD ladder). I recommend a mix, including some cash at home for disasters such as power outages, earthquakes, floods, tornadoes, etc.

    The CD ladder is the last tier of the emergency fund to be tapped, because there is likely to be a penalty for cashing in early.

    Let’s go back to my hypothetical example of $3000/month expenses, and a six month e-fund.

    2 months in local bank/credit union money market
    1 month in E and/or I savings bonds (paper bonds at home)
    1 month in ING Direct or other online account
    2 months in laddered CDs (six $1000 CDs where one matures every two or three months)

    Plus cash at home sufficient for about a week

    You can tinker with these proportions, of course. And as Trent said, this could also be considered the cash portion of your investments.

    If there’s an acute emergency that requires rapid access to a large chunk of cash that you can’t put on a credit card (e.g. your college-age kid was arrested for DUI, and you need to make bail), the first two items on the list will give you $9000 within an hour.

    If there’s a natural disaster and you have to evacuate, the cash at home, plus the first two items, plus your credit card lines, are likely what you will use.

    If you have an emergency where credit cards are accepted (hospital emergency room, furnace replacement, etc.), pay with the cards. Any part of your e-fund can be used to pay off the bill in full when it comes due.

    If you have a chronic emergency such as job loss, where you’re likely to be tapping into the e-fund for a period of at least several months, you’d probably let the CDs mature and not roll them over. The proceeds would go into the online account or the local money market account.

    As several readers have noted, inflation and escalation of one’s monthly living costs require topping off the e-fund every year or two. Consider using part or all of your tax refund for this purpose.

    I built my first e-fund with a tax refund check, and a $25 EE savings bond automatically deducted from my paycheck every two weeks. Eventually I had larger E savings bonds deducted automatically from my check, and had saved up enough money to start a CD ladder.

    Last year, I had to tap into my e-fund for a medical emergency. I paid out of pocket for many months of rehab therapy not covered by insurance, plus laying out tons of money for emergency room, surgeons, specialists, tests, etc.

    I saw many people in rehab who had to stop therapy because their insurance coverage ran out, even though they still needed the services. My e-fund gave me real peace of mind, knowing that I could pay out of pocket as long as necessary. It’s a wonderful feeling.

    I pared my budget back a bit to rebuild the e-fund more quickly than normal, due to the economic uncertainty and job stability concerns. I’ll probably add this year’s tax refund to the e-fund for good measure.

  31. I’m glad you touched on this Trent.

    Although some may tempted to go this route, as you pointed out quite descriptively in your article, it is advantageous on many fronts for them to save toward an ER instead.

    After all, as we read here every day, it is better for us to plod along slowly than to enter into unnecessary debt hastily!

    DebtFREEk!

  32. J Brown says:

    Save now or pay double later.

    We are living through this issue, even with a good job. Our ‘thoughts’ were we’ll get to it. I am making good money and I will pay it off later. The catch is, until you shred that plastic – you are still spending money you do not truly have.

  33. Matt says:

    Has anyone thought about keeping their Emergency Fund in their mortgage (or offset account) if it has a redraw option. This is what I’ve done, and it works well because I am saving alot on interest while its just building up there.

  34. J says:

    Are there that many people with their head still stuck in the sand?

    “why should I just keep cash in a savings account when I could be investing it and earning more with it elsewhere”

    You only have to look at the front page of the paper today to see how much risk investments in stocks are. Likely if you were trying to earn money somewhere outside a savings account (stocks or bonds) you’d be taking a nice bath right now.

    You may or may not be waiting for your job to be eliminated in the next round of layoffs, or when your entire company collapses.

    The cash I have in my emergency fund is MINE. I choose how to spend it (on emergencies :) ). I don’t have to worry about how to make a payment to keep it. I don’t have to worry about an interest rate. I don’t have to worry about the line being cut. With a credit card, you have NONE of that. NONE.

    Credit cards are a tool for credit card companies to make money. Sure some people pay them off every month, but there are some people who also make money gambling. Of course, most don’t.

  35. EF says:

    This is exactly why people need 8-12 months of living expenses (ready cash on hand) *these days* Maybe even 16 months in the future.

    No one’s job is totally secure now. Better to have money in the bank for emergency funds – and lots of it. Don’t rely on credit cards for anything.

    Adjust with the times.

  36. Anne says:

    Using a credit card for emergencies is a brand of “magical thinking,” rationalizing that it’s OK. I can see using it in a huge emergency (car breakdown on the highway, hospital ER), but other than that, it’s a trap. Credit card debt is the modern form of serfdom. I think it shouldn’t be called an emergency fund, because then people tend to not use it for unexpected expenses, as they are not an “emergency.” Use it for the “life happens” expenses, and then replace it. Being in debt narrows your options, as Cathy pointed out in her story. Having cash for “life happens,” keeps you out of the debt cycle.

  37. Shelby says:

    My husband and I have an emergency fund. He is in the military, so we do not have to plan for traditional financial “emergencies.” Instead, we save for unexpected moving-related expenses.

    We have split our “e-fund” into 2 pools: $2500 cash in an online savings account and $3500 in a CD ladder. We have our 4 CDs staggered so that one is maturing every 3 months. We have found that there is no risk to the CD ladder for at least 2 reasons: (1) we cannot forsee when an emergency will happen and (2) it is ONLY AN INTEREST PENALTY that we would pay when redeeming a CD early. This first point means that an emergency could happen in month 1, month 2, or even month 3 of our CD rotation. An emergency could strike in the exact month that one of our CDs is maturing anyway. We will always have a 1/3 chance that will be the case with a 3 month stagger on our maturity dates; this is low enough risk for us! My second point earlier means that if we did have to cash in other CDs before maturity, we would only have to pay an interest penalty on the money. This is also low-enough risk for us because the interest penalty is money that we would not have had anyway, if we had left the money in a savings account. I argue very favorably for the benefits of incorporating FDIC-insured CD ladders into your emergency fund. Did I mention FDIC insured?

    People see financial investing as either pessimists or optimists: the pessimists see only money that they are losing because they “could have had more” somewhere else, the optimists see the money that they “wouldn’t have had anyway” if they had stayed where they were. I am a financial optimist.

  38. kitty says:

    I agree for the most part. I’ve used cards for years, have always paid my balance in full, have considerable savings and no debt (paid off mortgage). But what I think many people are forgetting is that there are emergency situations when your fund isn’t going to suffice. How many people here can afford to pay $5000 every 3 weeks for a cancer treatment? OK, let’s say your insurance covers 80%, this still adds up to a nice amount. My employed friend with an OK medical insurance ended up with mid-5 digits medical bills from her husband’s sarcoma treatment. Her original bills were in 6 digits – after the insurance refused to pay for chemo after approving it before (“this type of chemo isn’t approved for exactly this type of cancer”). After successfully appealing, she was left with “only” 5-digit worth of co-payments for surgery, chemo, tests, etc. Yes, she borrowed from credit cards – mostly at 0% when she could. Her husbnd is in remission now, have been for the past 6 years, surely most would agree it was worth it. She paid it all off, by the way.

    Medical and legal bills are obvious examples, but I imagine there are others.

    Yes, one needs to have savings, and I’d say in this economy it should be a whole lot more than 6 months. Most of the programmers and software engineers who lost their jobs in 2001 took a whole lot more than 6 months to find a new job. Right now people in many sectors are losing jobs and very few complanies are hiring. At least in some areas. So as much as I’d love everyone to invest most of their money in the market so that my stocks go up, I think “safe” savings are important.

    I prefer to talk in terms of “savings” rather than “emergency fund” because as NYC reader (comment #21) said – it doesn’t have to be all in cash. You can have an interest-bearing checking or saving accounts for the first couple of month and several CDs with different maturity dates, for example.

    ” Sure some people pay them off every month, but there are some people who also make money gambling.”
    I don’t think it’s a good comparison. Overspending with credit cards is a matter of choice, and, consequently, barring life-and-death emergencies, carrying a balance is a matter of personal choice. With gambling, you have no control over the outcome at all. People who win gambling occasionally simply get lucky. People who use cards but pay their balances in full are simply responsible and have common sense (which I realize is far from common).

  39. Rambutan says:

    East Asia Emergency Fund consists of the wife’s hoard. Husband works and has responsibility for all household expenses. Wife accumulates money by saving from household budget (thrift), by working, or any other means; but her money is not obligated to the family budget. The wife creates and owns the emergency fund. If they get divorced the money goes with her – that’s an emergency, right? Otherwise if there is any kind of problem such as a natural disaster or accident or excessive college costs for junior, and the husband reaches the limit of his resources, the wife steps in and helps.

  40. I think having a credit card around can help in the transition from being in debt to beginning to save. If you have no sort of line of credit, be it savings or credit, and an emergency does come up, you are putting yourself in a bad situation. It is best that a person doesn’t use a credit card for emergencies unless absolutely necessary. They should be working hard to build up an emergency fund so that they don’t have to rely on a credit card.

  41. almost there says:

    Elisabeth, regarding comment #14, perhaps a stockpile of toilet paper could be used for an EF. :) Buy it at Sam’s Club in the big 40 roll (2ply 450 sheets per roll)boxes at 50 cents per roll with tax included and sell for a buck a roll. A 100% ROI! (less expenses) I live in a college town and just think that it may be a new business. Think of it. On call (late night with pizza delivery hours) delivery for a couple bucks a roll with a jazzy van painted with _ _ _ _ Happens all over it. Trent, perhaps a franchise for Drake University? Just remember to give credit to this retired CU Buffs employee.

  42. john says:

    Until I got laid off I always asked the same question, “Why bother with an emergency fund when you have credit cards?” but I don’t ask that anymore – I was lucky enough to get a nice severance and I continued paying off the credit cards fully while unemployed. While doing so I realized that our stress level would have been so much higher had we been amassing credit card debt. What we didn’t spend of my severance is now going to seed our emergency fund, which we’ll be focusing on growing until it’s at the level we need.

    Cash is king!

  43. Ken says:

    I agree about having it in cash. Paying those interest payments on an emergency just bums me out. Good advice.

  44. If you are building an emergency fund there are two stop gap measures you should employ until the emergency fund is fully funded:

    1) Clear your credit cards and have them ready for “real” emegencies. Be sure they are used ONLY for real necessities . . .

    2) Get disability insurance, if you can’t work and there is no emergency fund– you are screwed. After the emergency fund is built, you can reduce the coverage or eliminate it . . .

  45. J says:

    kitty —

    I wasn’t comparing gambling and credit card use per se. I was making the observation that credit card companies and casino companies both stay in business based on people either losing money at the tables or paying fees and interest. If everyone paid off their credit card every month and everyone always won at the tables, these businesses would not make the piles of money that they do.

    And I would completely disagree about your personal choice. Making the decision to carry a balance or overspend is as much as a decision to walk into a casino or buy a lotto ticket. The casino route is just likely to use up your money more quickly :)

    I paid off my cards YEARS ago. The only reason I keep one is that I travel for business occasionally and it makes it much easier to keep personal and business accounts separate.

    And back to the original post, credit cards are most likely NOT an effective emergency strategy.

    And to speak to your point regarding medical/legal bills — yes, of course, we can’t prepare for every possible emergency. However, the point of the emergency fund is that you should be able to cover critical car repairs, home repair, unexpected travel (for example, a funeral — NOT a wedding :) ), furnace repairs, etc. Also remember that Christmas and birthdays are not emergencies, either :)

  46. Golfing Girl says:

    @Jimbo, what happens when your credit card companies start slashing your limits (I’ve heard Amex is doing this to a lot of clients). There is no guarantee that credit will be extended to you-it is something that can always be pulled out from under you. And as for the stock market, Murphy’s Law will dictate that the market will be at its all-time low at the time you have an emergency.
    Your strategy is full of risk–more than most people with children are willing to take.

  47. NYC reader says:

    @Golfing Girl (#33)

    Not only is Amex cutting credit lines, they are doing so based on group risk, not individual risk. There was an article in the Wall Street Journal about Amex holders who had their credit lines slashed, even though they were never late and used the cards extensively. Amex said the lines were slashed because these cardholders shopped in the same discount stores (Walmart) and lived in the same zipcodes as people with lousy credit.

    Yesterday it was announced that Amex is offering $300 to some cardholders to pay off their accounts and close them out. The cardholders offered this deal have to pay off/close out their accounts by March 31, and then Amex will send them a $300 gift card. Supposedly Amex is targeting people whom they consider to be risky creditors.

  48. Chris says:

    NYC reader @ 3:26 pm February 24th, 2009 (comment #9)

    – I fully agree with that one. I ladder out my monthly expenses in CDs. Pretty easy to roll them over as they mature.

    Just a little addition.. I would rather have a HELOC than a credit card for an emergency, you have more time to pay it off, the interest rate is lower since it is a secured LOC, and the interest is dedudctible. You still don’t want to use it, but if you HAVE TO, I think that’s the way to go.. Thoughts?

  49. NYC reader says:

    @Chris

    The danger of using a HELOC (Home Equity Line Of Credit) is that it’s SECURED debt.

    Let’s say you have the really bad medical situation described by Kitty (#26). If her friend had a job loss after putting all those medical expenses on a credit card, she might have declared bankruptcy. In a bankruptcy, unsecured debts, such as credit cards, can be discharged. Secured debts cannot. If the friend borrowed money from a HELOC to pay the medical bills, she would still owe that money after bankruptcy.

    That’s also one reason why it’s a TERRIBLE idea to cash in retirement savings to pay debts (@Jen #11). In a bankruptcy, creditors cannot go after your retirement accounts (IRA, 401(k), etc.). Other problems with tapping taxable retirement accounts include having to pay taxes and 10% penalty on the amount withdrawn. And of course, once the money is removed from the retirement account, you can’t put it back in (there’s a very small exception for members of US military Reserve and National Guard who are called up for active duty, but it’s very limited).

    If you have a Roth IRA (or non-deductible contributions to a traditional IRA), you can withdraw your contributions (not the earnings) at any time without taxes or penalty. That should be considered a last resort for truly desperate situations (e.g. you can’t even get the medical treatment without paying up front, and you have no other options for payment).

    In my opinion, HELOCs (if used at all) should be reserved for home-related emergency expenses, such as the emergency new furnace.

  50. J says:

    HELOC’s are bad, for the reasons NYC reader already described. Also keep in mind that the amount of the credit line can be changed by the lender, and also that it’s entirely possible to end up in a situation where
    (original mortgage + HELOC) > (amount house is worth)

    Then, if you have to sell the house, you sell at a loss and are still liable.

    The bottom line is that an emergency fund needs to be “cash” — where “cash” is defined as a readily available supply of money. If it’s in a money market account, high-yield savings, part of a CD ladder (and you can live with the early withdrawal penalties), these likely all count. I wouldn’t recommend hiding it under your mattress. But anything that involves the term “credit” — be it credit card, HELOC, etc — is not cash and should not be considered part of an emergency fund.

  51. Sure a credit card is an appealing option for an emergency fund in theory, but I would agree that you may find yourself back in the hole you’re trying to get out of if you always just depend on a credit card.

    Develop the discipline to save up cash and leave it alone. Your perceived lost interest will be made up for with restful, peaceful nights of sleep.

  52. reulte says:

    If your emergency is a job loss, then after a month it is no longer an emergency (a tragedy – yes; but no longer an emergency). After a week or so of job loss, you’d better hunker down and rethink your actions. I like NYC Reader’s (#30) assessment of various strategies.

    In am emergency you check – immediate risk of further danger then life/limb/health then shelter, food and water. In an emergency, I’d first use my credit card (paid back at end of month – then probably not used again for the reasons that Trent points out), cash and check because those items are the easiest to get at any given moment. Depending on how much further the emergency continues to affect me; I’d continue onto my emergency fund (I have 18 months living costs) then laddered CDs (I used to receive child support and this amount immediately went into CDs — various maturing times) and savings bonds. After CDs I’d hunkering into my portfolio — yes times are bad to sell, but in an emergency that’s not your concern. Your concern is to get the most that you can AT THAT MOMENT. As a last resort, I’d cash out the retirement money. All during this time, I’d be assessing what can I do about this emergency and how long is could possibly and probably lost — am I likely to need to go this far? Is this liable to affect me for several months or several years? How does this affect my long term goals? I’d ask for help (hey – no pride here, I’m a single mom). I have friends and family: Can I trade some work for money? Can I ask for help babysitting while I take a 2nd job? Can I request rides to the medical office or job interviews? Can I move in and sell my house (that’s hypothetical, I don’t own a house)? Can you give me advice on making the best of my situation as it stand right now? Can you suggest someone who can help? What can I sell of my belongings? What can I give up that costs money? I’d be asking myself these questions not just once, but constantly until I could sleep comfortably at night.

  53. KoryO says:

    A HELOC as an emergency fund? Well…..I got a house in Florida. I even still have equity in it after the price crash, have renters who pay on time, every month, and are employed in a secure field (nursing). We’ve never missed a payment on the mortgage, and our FICO scores are excellent (ours and the renters). They even signed a renewal on the lease just this month to live there another year.

    I can’t even get the stupid mortgage refi’d to an *investment* loan. The banks and credit unions don’t care about *any* of the facts. They take a look at the area code (much like Amex has done), and figure we are deadbeats waiting to happen, because, hey, isn’t everybody in Florida in foreclosure? HELOC’s are pretty much out of the question for anyone in the Sunshine State, and if you want a mortgage to buy a condo, well….good luck to you, Sir, cause you’re gonna need it. IF you can get them to give you one, they’ll probably require that you put 75% down, and that’s if they are feeling generous.

    (As for the poster with the 5 figure medical bill/use the retirement fund question…..DON’T DO IT! Work out a payment plan with the hospital, declare bankruptcy if you must, but don’t bleed your retirement savings and don’t put it up against your home equity if you have some. Check with a bankruptcy lawyer to explore your options before you make a single move. Yes, BK sucks, but it’s not like you got there by being a shopaholic. Best of luck to you!)

  54. karen says:

    I’m using a high interest rewards online checking account to stash my EF. I found one through checkingfinder.com – anyone else try this? I’m also thinking about buying an I-Savings bond. Is this a good idea? Thanks!

  55. Joanne (NJ) says:

    Trent,

    This post opened up a very intense discussion between my co-workers. One friend brought forth a point that made the group really think – we are all trying to become “debt free” and not rely on credit – even in emergencies. However, the federal government has done just that – used the China Credit Card as an “emergency fund” to provide stimulus to calm the fears of Americans and make them spend more to boost the economy. The sad fact is that this debt will be around forever and will not be paid off in our lifetimes – sort of like leavin your personal credit card debt to your children (something all of us would never want to happen). This conversation went off in many directions with some people getting very emotional. Many of us do put aside as much as possible and try to be “debt free” while still raising smart children with college education. Why is it that we do not stand or such fiscal irresponsibility within our own homes, but we stand at the sidelines when the government does it?
    I know you spoke previously of entering politics – please keep this in mind when and if you run for office.
    Have a great day!!!!

  56. kitty says:

    Karen (#84) – “I’m also thinking about buying an I-Savings bond. Is this a good idea? Thanks!”
    Karen, I suggest you read everything you can about I bonds on http://www.treasurydirect.gov. I have a little of money in I bonds, but I view it mostly as a possible hedge against inflation, not as emergency fund. A few things you should know:
    a) you can’t redeem them for 1 year
    b) if you redeem them before you hold them for 5 years you lose 3 month interest
    c) while the composite interest rate now is 5.64%, it is only true until the end of April. If you buy now, you’ll get fixed rate of .7% + inflation adjustment (based on formula). During the first 6 months of 2008 the inflation was high because of the oil bubble we had, but the second half of the year, the inflation was very very low. We may even have had deflation. Which means the inflation adjustment in May will be either extremely low or 0% or even negative. You’ll never lose your principal, but you can get 0% composite rate. If you wait till May to buy I bonds, you’ll get a different fixed rate. It could be either greater than .7% or less, nobody knows.
    It’s really up to you – you can wait until May to see what the fixed rate it, you can buy now if you think it’ll be higher. How good I bonds will be long term depends on if you believe that all of this government spending will cause inflation or if we are in for a long deflationary period. Personally I am waiting till May – the fixed portion of .7% doesn’t appeal to me, but if the fixed rate goes down on May 1st, this will end up a wrong decision.

    Also you are only allowed to buy 10K of I bonds a year – up to 5K through treasurydirect.gov and up to 5K in paper bonds from a local bond.

    Another alterenative is TIPS. Again, I suggest you read all the information on treasurydirect.gov and make an informed decision.

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