Author Topic: Using Credit Card as Emergency Fund  (Read 4693 times)

enpower

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Using Credit Card as Emergency Fund
« on: December 23, 2013, 01:50:32 PM »
Hi,

I'm single and in my 20's. I've paid off all my student loans and am debt free.

I currently have a $2000 rainy day/emergency fund that I've used once in the last 4 years for a $800 car bill.

I've never had a credit card, but am looking to get one and use for my rainy day fund for any medical bills or car bills. I figure I'm only earning 3% on my $2000 emergency fund and if I investing that $2000 into stocks instead I could earn around 10% which is the stock market average. So that difference of 7% on my $2000 is $140 per year.

The fee for setting up an overdraft is $50 and then the interest I would be able to pay it off from wages in under 2 months. With a credit card, I could pay the bill and with the 45 days interest free I would be able to pay it back by then end of this and not get charged interest. The yearly fee on the credit card is $34 so I essentially save over $100 each year by getting the credit card.

Anyone else use this method?

If things got really bad and I lost my job, I'd move in with my parents again to save on any expenses.

Will

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Re: Using Credit Card as Emergency Fund
« Reply #1 on: December 23, 2013, 01:58:06 PM »
Why pay an annual fee for a credit card?  There are a lot out there with no fee at all.

I hope you realize that you cannot count on future earnings based on past performance.  Yes, the stock market might average a certain amount over time, but that certainly doesn't mean you will get an extra $140/year on your $2000.  You could easily lose $140 or more each year.

To answer your question, I have a variety of sources of funding I could use for emergencies, with credit cards being part of that mix.
« Last Edit: December 23, 2013, 02:34:16 PM by Will »

Jamesqf

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Re: Using Credit Card as Emergency Fund
« Reply #2 on: December 23, 2013, 02:27:20 PM »
With a credit card, I could pay the bill and with the 45 days interest free...

These days, you can easily find cards that offer 0% interest for a year or more, plus 1% or more cash-back on purchases, and $100 or so signup bonus.  There's a link off MMM's blog page to a finder site - Credit Karma, IIRC.

Frankies Girl

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Re: Using Credit Card as Emergency Fund
« Reply #3 on: December 23, 2013, 03:07:40 PM »
I second (third) the idea that you shouldn't get a card that has an annual fee.

I think using credit cards as your emergency fund can be dangerous if you don't have actual cash to back up. The only time it is a good idea in my opinion is if you pay the card off in full every month, and you have sufficient funds available to pay everything in full otherwise.

And while getting started in investing is a great thing to do as early as possible, just keep in mind that the "average" returns aren't guaranteed. You could have a year where it earns 10%, but then a few years where it goes negative, which with a smaller amount, can be much more nerve wracking if you're counting on that amount to back up as an emergency fund.

If you have access to a 401K (or go for a Roth IRA if not) then why not start making contributions to those to get into investing instead of throwing in your emergency fund? Until you get a larger chunk of investments and revenue streams to provide a cushion against the downtimes in the market, that's the best way to get into it - at least in my opinion.

And congrats on paying off your student loans and being debt free - that's a great start!

LadyMuMu

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Re: Using Credit Card as Emergency Fund
« Reply #4 on: December 23, 2013, 03:14:46 PM »
You're just getting started out and you don't have much money saved. It would be a mistake to co-mingle your emergency funds and your investment funds at this stage in the game. As many have pointed out, your investment can go south, and fast, and if you simultaneously have an emergency expense, you'll be pulling out of the market at the absolutely wrong time.

You are too young to remember the dot com bust. I was in my twenties at the time. My $17K in stock went to $7K almost overnight. Translate that to $2000 and you see your problem, right?

There is also the concern that your debt is very easy to access with a credit card while your emergency/investment funds are less liquid when in the market. This is a recipe for racking up debt.

Sure, get a credit card for emergencies/build credit. Keep your $2000 in the bank. Save another $2000 to invest.

aj_yooper

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Re: Using Credit Card as Emergency Fund
« Reply #5 on: December 23, 2013, 03:28:31 PM »
Congratulations on your EF and getting 3% on it is great.  Now start saving towards investing.  If you get a cc, get a no charge one with freebies.  I use cash and a credit card to handle emergencies.  There is no need to be so thin on cash when you start investing for the long haul.

StarryC

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Re: Using Credit Card as Emergency Fund
« Reply #6 on: December 23, 2013, 05:59:24 PM »
I'd keep the cash AND get a card.  $2,000 is not that much for an emergency.  The last two years have treated you well, but sometimes it seems like when it rains it pours.  $1000 is a root canal (after insurance) or a wisdom tooth removal or a transmission rebuild.  Depending on your insurance, it is probably not enough to have your appendix taken out.  It's an acceptable replacement car.  It is probably at most 2 months of living expenses if you lost your job, or maybe 4-6 months when combined with unemployment.  What if you needed a root canal, had to pay your health insurance deductible, and your car broke all in 3 months?

If you have other sinking funds you aren't telling us about (for car maintenance/ replacement, health care, job loss) then it might be ok to have a credit card only. 


Daleth

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Re: Using Credit Card as Emergency Fund
« Reply #7 on: December 24, 2013, 10:14:51 AM »
With a credit card, I could pay the bill and with the 45 days interest free...

These days, you can easily find cards that offer 0% interest for a year or more, plus 1% or more cash-back on purchases, and $100 or so signup bonus.  There's a link off MMM's blog page to a finder site - Credit Karma, IIRC.

Discover is offering 0% for the first year. That's just one example.