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Using Credit Card as Emergency Fund

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Wino
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Using Credit Card as Emergency Fund  Reply with quote  

As most here know, my income is sufficient for my normal needs without any drama. I don't have any single, well-defined "emergency fund."

I keep several thousand dollars moving between my Dubai accounts and my US accounts, so there's always a cushion for me to fall back on; usually several thousand dollars that's just churning and not really doing anything other than providing padding for the money transfers that come every month.

In addition, I have a couple of extra accounts that are remnants from earlier financial set-ups. In my mind, I've called these "emergency funds" to justify not closing the accounts and moving on.

Well, I've been considering just closing out my "extra" accounts, and using one of my credit cards as my emergency fund. I think I can manage to wait a month if I need the money to pay off the card. Even at 12% interest rate, that's only 1% per month if there's no money elsewhere to pay it off in full before I receive any market withdrawals, and that market fund should be making more during the other 11 months to make up for that 1% for that one month.

But as I'll probably cover it by cashing out some money from a mutual fund, I should have the funds available before the 30 day grace expires.

See, oldguy? I'm coming around to at least PART of your method.

This internal discussion I've been having has come about because I cannot see any value in keeping money in an account that loses value over time due to inflation. Just because they juggled the numbers to keep the CPI looking better, it doesn't mean real inflation - like it was measured when Carter or Nixon were presidents - isn't eating at everyone's money value at a 4% or higher rate while accounts are paying less than 1%.

Yet another vote from me AGAINST QE... but that's another post.
Post Thu Apr 18, 2013 2:07 am
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coaster
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You can think of the loss due to inflation as your cost to have the cash readily available. I have no problem with using credit available to cover a portion of emergency cash needs. However, you can't pay for everything with a credit card, and there's still nothing that beats cash to buy anything and everything that's needed. There's a cost to having credit; there's a cost to having cash; (TANSTAFL)

Don't paint yourself into one corner or the other. Stay loose. You can afford it.

PS - in your part of the world, you might consider having some silver and gold on hand as part of your "readily available cash" funds.

~Tim~
Post Thu Apr 18, 2013 3:19 am
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CharlotWilliams
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Having a credit card is a good preplan to fulfill urgent money requirements. But you need to make sure not to overuse as it will increase your debt.
Post Tue May 14, 2013 11:23 am
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MrNewEngland
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I have the same question but instead of a credit card I wonder about how dangerous it is to use a Home Equity Line of Credit as an emergency fund. I do that to an extent, and try to invest more while having less cash on hand. If something happened I could pull money off my HELOC for a while if needed (kind of a safety net). Is this a terrible idea?
Post Tue May 14, 2013 12:33 pm
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littleroc02us
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IMO, all forms of credit (home equity, cc's, etc) are horrible methods to use as an emergency fund. How does it make sense that you have no cash saved up and an emergency does arrive that the best idea is to go further into debt. Emergencies happen and there needs to be better planning. Some people will say, well I live paycheck to paycheck and there's nothing left. I guarantee I could look at 90% of people's budget and find a way for each of those individuals to clear money each month for an EF fund. That excuse doesn't work.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed May 15, 2013 8:33 pm
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Wino
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quote:
Originally posted by littleroc02us
IMO, all forms of credit (home equity, cc's, etc) are horrible methods to use as an emergency fund. How does it make sense that you have no cash saved up and an emergency does arrive that the best idea is to go further into debt.


I have cash, but not "saved up." It is churning between three different accounts: my local-currency account, my local US-dollar account, my US US-currency account. For "small emergencies," I can bring all three of those closer to their minimum balances to cover most emergencies; from $6K to $10K at any given time.

My credit cards are paid off. I have over $50K in credit limit on them. Most "major emergencies" can be covered until I can get the money to pay them off.

This leaves only two long-term emergencies: Losing my job and getting injured so I cannot work.

If I lose my job, then I can still use the credit cards until I can pull enough from my mutual funds to cover the lapse. My job loss will not be long term. I am lucky enough - after 30 years of hard work and effort (which is how many people get "lucky") - to have a very secure position. Even if the company I work for goes under, I am known within our industry and will have job offers as soon as word goes out that I am available.

If I am injured and cannot work, then I will be forced to retire, which is longer-term than emergency, and this contingency is the reason I am over here in Dubai: to set up my retirement 100%.

I really have thought through "using a credit card as an emergency fund," and think that it works for me, in my situation. I am not recommending this method to others, unless they can cover all the bases adequately: short term less-than $10K emergencies; not so short term greater-than $10K emergencies; job loss; work-related injury.

Insurance covers all the other contingencies, I think. If you think I've left something out, let me know. Maybe I've missed something and need to think about my credit card method.
Post Thu May 16, 2013 2:30 am
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coaster
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I think the one scenario you have not covered is the one you seem most concerned about in many of your other postings: world-wide financial crisis. What is your last-ditch backup plan if a time comes when nobody takes credit cards and nobody takes currency?

~Tim~
Post Thu May 16, 2013 5:01 am
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littleroc02us
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quote:
My credit cards are paid off. I have over $50K in credit limit on them. Most "major emergencies" can be covered until I can get the money to pay them off.




We can probably just agree to disagree, I wouldn't recommend that idea to anyone due to the fact that your borrowing money and your tapping into retirement to cover and payoff emergencies. I personally have an ef fund ready to go immediately to pay off problems that arise. It's real simple that way and always gets the job done.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Thu May 16, 2013 7:02 pm
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Wino
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quote:
Originally posted by littleroc02us
We can probably just agree to disagree, I wouldn't recommend that idea to anyone due to the fact that your borrowing money and your tapping into retirement to cover and payoff emergencies. I personally have an ef fund ready to go immediately to pay off problems that arise. It's real simple that way and always gets the job done.


Where did you get the idea that I'm pulling money out of retirement to pay things off? I said, "Mutual funds." That's not 401K and it's not Roth. It is no more earmarked for "retirement" than your EF is retirement. It is money I have set aside to not spend unless and until necessary.

Also, I am not borrowing money in the normal sense. I am covering the payment until I can liquidate a mutual fund or cover it with another pay check. I have 30 days to pull the money out or otherwise cover the credit card balance. Sure, I'm taking a chance on a down market when I withdraw from the mutual fund, but that is opposed to the guaranteed loss of a Money Market account paying less than inflation.

As far as the global collapse scenario: I plan to pay off my present house, and buy more houses. The "more houses" will have mortgages and most likely I'll form LLC's for them. I will buy them below market value, and in neighborhoods that I feel will increase in value. I've learned my lessons in real estate, and I think I can buy wisely.

I plan to invest in "debt" for the upcoming inflation. The fed is pumping $1 Trillion of unearned cash into the economy. The bubble will burst, and the markets will fall or fail when this spigot is turned off. At that time, real estate and debt will be the two best items to hold, as long as you did not overpay for the real estate during the bubble.

Whether the loss of Fed "stimulus" causes inflation or market crashes, people will still need to sleep indoors, and my interest rate will be a fixed rate. The worst case is that the real estate market also crashes, which is why I'll need the LLC's to cover my personal assets.
Post Fri May 17, 2013 1:36 am
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coaster
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Frankly, I think that's a pretty damn good plan. Wink

~Tim~
Post Fri May 17, 2013 5:35 am
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littleroc02us
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quote:
Originally posted by Wino


Where did you get the idea that I'm pulling money out of retirement to pay things off? I said, "Mutual funds." That's not 401K and it's not Roth. It is no more earmarked for "retirement" than your EF is retirement. It is money I have set aside to not spend unless and until necessary.




What your not getting is that my cash is liquid and is available in as fast as it takes me to wip out my debit card (the deal is done when you use cash), whereas your EF fund is invested in Mutual funds that go up and down and it takes some time for you to get it. So for example your sitting in Kansas getting your vehicle towed and their rebuilding your transmission and you have to put it on credit and then wait for your Mutual fund to cash out and then to pay off your cc at a later time. I don't have that problem, it's sole purpose is for EF's and not to make money off of. We just differ in our approach and I can't see doing it your way or would recommend it.

As for using credit cards, it is borrowing money and you pay it back whenever you see fit. IMO, your taking more chances with companies that make mistakes and problems can arise.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri May 17, 2013 7:54 pm
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