Emergency Fund vs. Credit score Card – Why put aside an emergency fund when you might make investments that cash as a substitute? Can a bank card function a dependable backup in emergencies? Let’s break it down!
Once I suggest 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 maintain such a big emergency fund in a financial institution FD or debt fund when it loses worth over time? Wouldn’t or not it’s higher to put money into fairness mutual funds and depend on a bank card as a substitute?” A lot of them have an honest bank card restrict, which makes them consider they’ll skip sustaining a standard 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 actually tracked their bills. Whereas they could earn an honest revenue, their spending habits are sometimes extravagant. Paradoxically, on the subject of 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 put up into two elements 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?
Throughout the second wave of COVID-19 in 2020, my spouse, daughter, and I all examined optimistic. Whereas their situations remained secure, I began feeling a bit uneasy about my very own well being. A few of my physician shoppers suggested me to remain house so long as my oxygen ranges had been regular, whereas others advised 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 turn into a critical problem.
Although the hospital belonged to one in all my shoppers and normally 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 Prime-Up plan. Nonetheless, given the heightened uncertainty throughout COVID, I made a decision to extend my emergency fund considerably—from the same old 6 months of bills to 24 months—to make sure higher monetary safety.
Trying again, we had been admitted to the hospital on 1st Could 2020. My spouse and daughter had been discharged on fifth Could, whereas I remained hospitalized till seventh Could. Regardless of having enough medical health insurance (Rs.10 lakh household floater + Rs.65 lakh Tremendous Prime-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 price 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 fee 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 Could, I successfully received almost a month’s time to make the fee 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 flexibleness to handle funds but additionally ensured a easy monetary circulation throughout a traumatic time.
The important thing takeaways from my expertise are:
- Use a bank card solely when you’re sure in regards to the precise emergency fund required.
- At all times have a transparent backup plan—when you use your bank card, you have to 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 belongings) apart out of your goal-based investments, by no means depend on a bank card as your emergency fund—it may possibly backfire at any second.
- And not using a correct backup, you might 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 device in emergencies, it ought to by no means be your major or solely security internet.
When NOT to Use a Credit score Card as an Emergency Fund
- When You Are Not sure of the Emergency Quantity – Should you don’t know the way a lot cash can be required, counting on a bank card will be dangerous, because the bills could spiral past your reimbursement capability.
- When You Lack a Liquid Backup – Should you don’t have an emergency fund or any liquid belongings (other than investments meant in 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 enormous monetary stress, particularly with excessive rates of interest when you can’t repay in time.
Backside Line: A bank card must be a short-term liquidity device, not a alternative for a well-planned emergency fund. Should you don’t have a transparent reimbursement technique, it could backfire badly, resulting in pointless debt or forcing you to dip into your long-term investments.
Check with this text which I wrote instantly after my discharge “My expertise of Covid and Private Finance Classes“.