Let’s think about this for a moment. Building and maintaining an emergency fund is one of the most important decisions you will make in your adult life. But some feel your emergency fund should be a credit card. This may sound good in theory, but the last thing you want to do when you’re struggling financially is add more debt to your existing problems.
The best thing to do is to use cash. That is why I and many other financial advisors teach having three to six months of your income or your expenses saved, whichever is greater. Having this fund in cash frees you from paying it back later and keeps you from going “deeper into debt when you have an emergency” Once you pay for an emergency, you’ve fixed your problem. Using a credit card only moves the form of the problem and prolongs paying for the problem.
Using cash for emergencies is a smart choice because it prevents you from accruing debt and interest charges. Additionally, it helps avoid overspending since you are limited to the cash you have on hand. Having a dedicated bank account for emergencies can help you avoid financial stress and improve your overall financial health. This fund is a great way to ensure you are financially prepared for unexpected situations. For instance, it can help cover medical bills, car repairs, or job loss without relying on credit cards or loans.
Here is an example. Cars break! And they don’t break on schedule. It is always an unexpected event and usually needs immediate attention. This is what happened. I typically do not drive with my windows open. If it is hot, I turn the air conditioner on. But, while on Active Duty, I’d have to roll my window down to show the guard my identification. On this particular day, when I rolled the window down, I heard a crunching sound, and the window did not move. The more I pressed the window down, the more the crunching worsened. I had no idea what happened. It turned the motor died and cracked the bottom of the window. Since it was not an accident, the insurance did not cover it. The cost to fix it was about $990. At this point in our lives, I was still paying off debt and only had my beginner emergency fund in my account. Besides the initial worry and shock about the car breaking, I paid for the repair. If I had paid for the repair with a credit card, the car would have been fixed, but I’d still have to pay the card bill when it arrived.
Having a credit card as your emergency fund is not a reliable option. They come with high-interest rates that can quickly accumulate, especially if you cannot pay back the balance in full. Relying on a credit card can lead to a false sense of security, causing you to neglect saving for emergencies. Having a separate account designated for emergencies is essential, so you can have peace of mind knowing that you have a financial cushion to fall back on.
Building and maintaining an emergency fund should be a top priority for everyone. While credit cards may seem like a quick and easy solution, there are more options to pay for emergencies. It is better to be prepared and have a dedicated emergency fund to ensure financial stability during tough times.
5 Tips to Start Building Your Emergency Fund
- Set a goal. Determine how much you want to save for emergencies and set a timeline to reach your goal.
- Create a budget. Identify areas where you can cut back on expenses and redirect those funds toward your emergency fund.
- Automate your savings. Set up automatic transfers from your checking account to your emergency fund to make saving easier and more consistent.
- Start small. It is recommended that you save $1000 as a starter emergency fund, especially while you are getting out of debt. If that seems too heavy, start with $500. The point is to start saving. Saving a small amount each month can add up over time and help you build your emergency fund.
- Avoid temptation. Keep your emergency fund separate from your regular checking and savings accounts to prevent the temptation to dip into it for non-emergency expenses.
Corey Stokes 