Is a Credit Card Your Emergency Fund?

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One of the sources of emergency funding that many of us turn to is the credit card. A credit card is easy to use as an emergency fund since a credit card is accepted almost everywhere (if issued by a major bank, and with a major company logo). It’s very liquid and you can usually take your time to repay the money that you spend.

While it can make sense in some cases to use a credit card for unexpected emergencies, you do need to be careful. It’s vital that you not go overboard and that you have a stash of cash as well.

Credit Card for Quick Access

In some cases, you might not be able to quickly access the cash in your emergency fund. This is true if you take steps to keep your ATM card for your high yield account somewhere safe. Or, if you are traveling and need immediate access to resources, stopping to get cash or waiting three to four business days to transfer money from your online account to your primary checking account isn’t feasible.

A credit card can be used in these cases to get you by. Using a credit card immediately has helped me out of several tight spots. However, your credit card should not be your only emergency funding source. It can be part of your overall strategy, but it shouldn’t be the only thing you rely on in a pinch.

When I use a credit card in an emergency, I immediately pay it off with my regular emergency fund funds. The idea is to have the instant accessibility without the worry of paying interest. Otherwise, you risk making your situation even more difficult since you may start piling up credit card debt.

Have You Thought of Using an Investment Account as Your Emergency Fund?

Notice I didn’t really explain yet where I actually keep my emergency fund. That’s because, unlike conventional wisdom that says I should have the money in a risk-free savings account, I keep my emergency fund in a “regular” taxable investment account. I started doing it a few years ago and so far, it’s worked out reasonably well for me. I have a more liquid account with less money, just for quick access, but I have a good amount in the investment account that can be drawn on.

Advantages of Using an Investment Account as an Emergency Fund

One of the things I’ve really liked about using the investment account is that the money grows faster. If you put your emergency fund in a savings account, the low rate means that you are lucky to get 1% APY.

You can use a CD ladder, but you have to be okay with having the money tied up for longer periods of time.
I invest in an all-market ETF with the investment account, and the money has grown nicely over the last few years. I use an automatic investment plan to have the money automatically taken from my checking account each month and invested in the fund. The money offers the potential for better returns and it’s fairly liquid. It usually only takes a few days for me to get my money if I need it (as I did a few years ago to pay for the aftermath of a flooded basement).

However, it’s important to note the risks. Even though an all-market ETF is generally considered fairly low risk, it’s still an investment and it can still lose value in the short term. For this method to make sense, your funds need to be invested for longer periods of time like five, ten, or even longer.

If you end up in an emergency before then, you might have to sell at a loss. That’s why this only really works in your favor if you have a larger investment account where the chance an emergency will wipe out a significant portion of your entire account is low.

Things to Keep in Mind with an Investment Account Emergency Fund

If you decide to go this route with your emergency fund, here are a few things to keep in mind:

Plan For a Delay: It usually takes between three to four business days for me to get my money when I need to sell an investment and then move it to a checking account. That means that I have to plan for the wait. So far, none of my emergencies have required the need for immediate money, so the wait hasn’t been a problem. But if I was in a different situation, I could use the more liquid portion of my emergency fund to hold me over for a few days.

I can also shorten the delay to two business days if I find a brokerage firm that has the check-writing ability, but I haven’t needed that extra day so far.

Choose Something Relatively Low Risk: Your investment should be something that is relatively low risk. I chose an all-market ETF because it exposes me to the whole market rather than hanging my emergency fund on my stock picking ability. As long as the market is trending generally upward over time, my emergency fund should do okay. One of my friends chooses a bond fund for his emergency fund investment. Do what works for you.

Use Dollar Cost Averaging: Be consistent as you build your fund. Dollar-cost averaging can help you build your emergency fund automatically. Like I said, the higher your balance and thus the better chance your money stays invested because emergencies won’t devastate the balance, the higher the chances that this strategy will work in your favor.

Bottom Line

Many people turn to credit cards when emergencies come up. When you don’t have time to get the cash, or when you don’t want the risk of carrying cash around with you, credit cards make a great option. However, don’t use your credit card as the only emergency fund. Back it up with an account that you can draw on later and that you can use to pay off your emergency purchases.

Even an investment account can work as an emergency fund. In fact, it can work wonders. Would you consider using an investment account as your emergency fund? It sounds dangerous but it’s nowhere as dangerous as relying on just a credit card for emergencies.

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