Emergency Fund vs. Credit score Card – Why put aside an emergency fund when you may make investments that cash as a substitute? Can a bank card function a dependable backup in emergencies? Let’s break it down!
Once I advocate that somebody put aside X quantity as their emergency fund, they’re typically shocked by the determine I recommend—usually round six months’ price of bills. Many don’t pay a lot consideration to their month-to-month spending, however when that quantity is multiplied by six, it abruptly appears overwhelming. Nonetheless, my recommendation stays the identical: setting apart this quantity is essential for monetary safety.
The following query they typically ask me is, “Why hold such a big emergency fund in a financial institution FD or debt fund when it loses worth over time? Wouldn’t it’s higher to put money into fairness mutual funds and depend on a bank card as a substitute?” Lots of them have a good bank card restrict, which makes them consider they will skip sustaining a conventional emergency fund.
Emergency Fund vs. Credit score Card: Which One Ought to You Belief in a Disaster?
The issue with this mindset is that they’ve by no means really tracked their bills. Whereas they could earn a good revenue, their spending habits are sometimes extravagant. Sarcastically, with regards to setting apart six months’ price of bills as an emergency fund, the quantity feels overwhelming—but their lavish spending by no means does!
Let me break up this submit into two components when to make use of a bank card as your emergency fund and when not.
When to make use of Credit score Card as an emergency fund?
Through the second wave of COVID-19 in 2020, my spouse, daughter, and I all examined optimistic. Whereas their circumstances remained steady, I began feeling a bit uneasy about my very own well being. A few of my physician shoppers suggested me to remain residence so long as my oxygen ranges had been regular, whereas others instructed hospital admission as a precaution. Their concern was that if my oxygen ranges dropped and all three of us wanted hospital beds, discovering one might change into a critical problem.
Regardless that the hospital belonged to one in every of my shoppers and often accepted cashless hospitalization, the excessive demand on the time led them to insist that I pay the invoice upfront and later declare the quantity from my medical health insurance supplier.
At the moment, I had a Rs.10 lakh household floater medical health insurance coverage together with a Rs.65 lakh Tremendous High-Up plan. Nonetheless, given the heightened uncertainty throughout COVID, I made a decision to extend my emergency fund considerably—from the standard 6 months of bills to 24 months—to make sure higher monetary safety.
Trying again, we had been admitted to the hospital on 1st Might 2020. My spouse and daughter had been discharged on fifth Might, whereas I remained hospitalized till seventh Might. Regardless of having enough medical health insurance (Rs.10 lakh household floater + Rs.65 lakh Tremendous High-Up) and a well-funded emergency corpus, I selected to pay the hospital payments utilizing my bank card as a substitute. The rationale? I used to be assured that the hospitalization value was considerably decrease than each my insurance coverage protection and emergency fund, permitting me to handle liquidity effectively.
After being discharged from the hospital, I utilized for reimbursement with my medical health insurance firm, and so they settled the declare inside round 15 days. Since my bank card billing cycle falls on the twentieth of each month, with the cost due earlier than the tenth of the next month, I had ample time to clear the dues. Since I had swiped my bank card on the fifth and seventh of Might, I successfully obtained practically a month’s time to make the cost with none curiosity burden.
In case the medical health insurance firm had rejected our claims (mine, my spouse’s, and my daughter’s), I had a backup plan—my emergency fund was greater than enough to clear the bank card invoice with out touching a single rupee from my goal-based investments. This fashion, I used to be financially ready for the worst. Nonetheless, as talked about earlier, the declare was settled—100% for my spouse and daughter, and round 90% for me. Utilizing my bank card strategically not solely gave me the pliability to handle funds but additionally ensured a clean monetary stream throughout a demanding time.
The important thing takeaways from my expertise are:
- Use a bank card solely if you end up sure concerning the actual emergency fund required.
- At all times have a transparent backup plan—for those who use your bank card, you should be 100% certain which you could repay the invoice inside the due date with none delay.
- In case you are uncertain of the emergency quantity wanted or don’t have an emergency fund (or different liquid property) apart out of your goal-based investments, by no means depend on a bank card as your emergency fund—it might backfire at any second.
- And not using a correct backup, you may both:
- Miss the due date and incur heavy curiosity fees.
- Be pressured to withdraw cash out of your long-term investments, disrupting your monetary targets.
So, whereas a bank card generally is a sensible monetary software in emergencies, it ought to by no means be your main or solely security web.
When NOT to Use a Credit score Card as an Emergency Fund
- When You Are Not sure of the Emergency Quantity – In case you don’t understand how a lot cash can be required, counting on a bank card may be dangerous, because the bills could spiral past your compensation capability.
- When You Lack a Liquid Backup – In case you don’t have an emergency fund or any liquid property (other than investments meant on your monetary targets), utilizing a bank card can put you in a debt lure.
- In Case of Hospitalization with Inadequate Well being Insurance coverage – In case your medical health insurance protection is insufficient, relying on a bank card to pay medical payments can result in big monetary stress, particularly with excessive rates of interest for those who can’t repay in time.
Backside Line: A bank card needs to be a short-term liquidity software, not a alternative for a well-planned emergency fund. In case you don’t have a transparent compensation technique, it could backfire badly, resulting in pointless debt or forcing you to dip into your long-term investments.
Confer with this text which I wrote instantly after my discharge “My expertise of Covid and Private Finance Classes“.
