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)!