Do You Have an Emergency Fund? - If Cash is King, Then Don't Neglect His Good Looking Brother, the Prince of Credit!

That's right, credit can be just as valuable a tool as cash, when it comes to keeping an emergency fund. The next time you're thinking seriously about your financial house, take some time and think of the scenarios and options discussed here as possible tools to help you achieve your goals. Hopefully you'll think about having a Credit Emergency Fund from now on.

What are the benefits of pursuing an all Credit Emergency Fund? How about:

  • Being able to max out your yearly 401K contributions
  • Maxing out your company ESPP program for huge returns and free money!
  • Getting immediate huge high-interest rate returns by paying off your high-interest credit cards
  • Investing in stocks, bonds and mutual funds that return a higher rate of return than emergency fund savings accounts for your retirement
  • Investing in real estate and business ventures

I'd like you to think about the possibility of having a credit-only emergency fund. Yea, I know, sounds scary ... just think about it. Grab a cup of coffee and just think about the info in this post. I'm sure that if you don't decide to get rid of your cash emergency fund, you'll at least think about it a little differently
;-).

First on the list is outstanding credit card debt. Do you have a sizeable amount of high-interest credit card debt? If you can answer yes to this, then here's reason number one to get rid of your emergency fund. Put it to work! That's right you can be a financial Warren Buffet and make 13%, 15%, possibly even 25%+ this year on your money. You must be absolutely positively sure that you are on track with your credit card spending habits before trying this method. Because if it was your out of control spending habits that got you this large credit card debt, then paying it off without fixing your spending habits isn't going to help. You'll simply end up with a Credit Emergency Fund of credit cards that are just charged back up with bad spending habits. That's a no no!

You may have been diligently building an emergency fund for a rainy day. That fund has been sitting there earning 3%, 4%, maybe 5%+ if you've jumped into some of the great online savings accounts out there. Here's a chance to get a guaranteed high-interest return on that money. Knock out all that pulse pounding high-interest credit card debt. Don't cancel any credit cards. If you still have outstanding debt after this move, then continue to work to reduce it. A great post on pfadvice.com puts credit card debt vs. emergency funds into perspective with this piece of advice:

...While this may give you some peace of mind, it’s a false peace of mind - you will never really have a true emergency fund until all your credit card debt is paid off…it’s as simple as that.

Second in the lineup, your HELOC. Think about using your HELOC as an emergency Fund. This is an excellent source of cheap money. Dr. Don, at Bankrate.com says to make sure of these points:

If you decide to take this route, it's important to have the credit line in place before you need it.

If the HELOC comes with a credit card, you want to avoid the temptation to use the credit card for nonemergency purchases. ... Activate the card but put it somewhere safe and out of reach, like in your safe-deposit box.

If you plan to use the HELOC for any other reason, make sure you get a large enough line to cover both needs. If you're planning to use the HELOC to finance an automobile, for example, you'd want to still have enough room on your credit line to handle a short-term financial emergency.

This is an excellent option, if you already have a HELOC open and available credit line to cover as an emergency fund. Most HELOCS with credit cards offer the same interest rate for cash withdrawals from ATMs, so this is just as convenient if you need actual cash. You can get it at the same low rate as the HELOC money.

Third in the lineup is Credit Cards. But, this time I'm talking about credit union credit cards. As I've been building up my personal Credit Emergency Fund of credit cards, I've noticed a couple of really wonderful things about credit union credit cards:

  • They often are easier to get approved than normal credit cards
  • They often give higher credit limits than normal credit cards
  • They often give much lower interest rates than normal credit cards
  • They often give you the same low interest rate for cash advances at ATMs as they do for regular purchases!
  • They are now easier than ever to qualify for membership
  • Once you are part of that credit union, They often have offerings for great rates on loans (car, home, equity, etc.)

I love the fact that I can get cheap money from my HELOC checks and credit card. But, second in line to that cheap money is the cheap money I can get from credit union credit cards from any ATM. You may have been bitten by huge minimum fees and even larger interest rates on cash advances from ATMs on regular credit cards. Just not the case with most credit union cards (check your membership info for details). So, in emergencies, these are second in line after my HELOC line of credit!

You can find out about credit unions in your area with one of these sites: http://www.joinacu.org/ or http://www.ncua.gov/indexdata.html . Now days you can generally join any credit union in your state, as most have the minimum requirement of being a resident of the state that they operate in.

Fourth in the Lineup are your Credit Cards, again. This time regular non-credit-union credit cards. Obviously HELOC credit cards and checks are probably going to be your cheapest source of money. They should therefore be your first tier in your new Credit Emergency Fund. In her MSN Money Article: $0 Emergency Fund, Liz Pulliam Weston, mentions another interesting fact about regular credit card usage for emergency funds that I didn't think about:

...And credit cards have a feature that home equity lines lack: If you wind up filing for bankruptcy, balances on unsecured debts like credit cards may be erased, while secured debts like mortgages and HELOCs can't be discharged.

Hopefully no one will have to use that feature, but it's nice to know there's some advantage to using credit card debt versus your HELOC credit.

Now after all of that, I hope you see the many advantages of building your Credit Emergency Fund and put your old cash emergency fund to work making some more cash! If you ever feel the need to hang on to big wads of emergency cash, then you have cheap cash avail to you from your HELOC credit cards or credit union credit cards at really cheap rates. You'll never have to worry about going into one of those loan offices that charge you 99.25% on your money for a short term cash loan (seriously, they're charging consumers that rate)!

6 comments:

plonkee said...

This may be a good idea, but the thought of using credit cards as my main emergency fund makes me feel more than a little sick. I guess it helps that I don't have any major debt at the moment other than my mortgage.

Jason said...

Good article. I found it through Carnival of Personal Finance #114, and I am going to mention you on blog as well at http://finance.jasoncrews.name.

Thanks!

Margaret said...

I agree with this in principal. I figure as long as I can take out the money again at the same interest rate in case of emergency, then at least I am not paying interest on that portion for those months. E.g. if I owe 10,000, and have a 1000 emergency fund, I could put it towards the 10,000, pay interest on only 9,000 and then in case of emergency take out the 1,000 and only then pay interest on the whole 10,000. In fact, I did almost this exact same thing -- I have various credit card debts at all kinds of different interest rates. I was saving for annual expenses (e.g. car insurance), and I thought instead of letting it sit in my ING account getting 3% interest, why not put it againt my ING line of credit and save me 10% until I need to use it (I put it there instead of on a higher rate card because some cards charge a percentage for taking cash advances, and also because it was the most convenient). I did this for a while and had $1400 "saved" in my line of credit (which had been maxed out). It was quite a blow, then, when I received a letter stating that my line of credit had been REDUCED by $1400 due to increased amount of credit showing up on my credit report. So all my annual savings were "gone". Obviously, it is good that my total debt was reduced, but it created a serious cash flow problem as I had needed to take the money out the next month to pay the insurance. I also found it quite an amazing coincidence that their review of my credit led them to reduce my available line of credit by EXACTLY the amount that I had paid off.

Anonymous said...

Carnival of Smart Money #1 -- teaspoon presents Do You Have an Emergency Fund? - If Cash is King, Then Don’t Neglect His Good Looking Brother, the Prince of Credit! posted at www.TeaspoonFinance.com - Financial wisdom, one teaspoon at a time…, saying, “This post discusses the hidden untapped investment potential in many financial plans, the emergency fund cash. I discuss the advantages of totally investing your emergency fund cash in high yield options (maxing out 401k, maxing out espp & espp free money, mutual funds, etc.). I go on to discuss the fact that you can put together an all credit emergency fund that is just as powerful and possibly more advantageous than your old cash emergency fund.”

Ms. M&P said...

This is really helpful for me. I've been feeling guilty about not building a better EF while I'm trying to get out of debt, but now I think it's my best option. I don't want to always rely on a credit card EF, but for now, it makes the most sense. Thanks for this post. It was very timely for me.

Anonymous said...

You make a good point as long as you have the discipline and not indulge yourself and rack up credit card debt unnecessarily.