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Budget Mistakes: Using Credit Card as an Emergency Fund

by Elle on May 9, 2011

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One great thing about credit cards is that you can use when your car breaks down on the highway and you need a tow and there’s not enough cash in your wallet or an ATM nearby.

If you have that cash in savings, you’d immediately pay your card and you’ll have no interest to pay. The problem is when you don’t have the savings and that emergency is growing on your credit card.

Start an Emergency Fund Quickly

A first goal is to save enough to cover monthly bills, then your next goal might be 2-3 months. Have a portion of your paycheck transferred to a high interest savings account. Start small, like 5% of your income, and automate your money to transfer to high yields savings. You’ll be surprised how you won’t notice the little decrease in spending money. If you get comfortable, you can increase the amount.

Looking for a few ideas on finding money to save? Try out Flexo’s 50 tips to starting an emergency fund. Here are my top 5 from the list:

  • Whenever you purchase groceries with a coupon, deposit your savings into the bank.
  • Tutor a young student in a subject you know.
  • Reuse any items you can rather than buying new, and pocket the difference in your emergency fund.
  • Shop around for a new insurance provider.
  • While paying attention to small, repetitive expenses, don’t ignore larger decisions like your car, house, and wedding. With smart choices on big-ticket items, you could fully fund an emergency account with the savings.

It doesn’t have to be difficult to save some money. You just have to be creative and motivated to make it happen.

Why We Use ING Direct for Our Emergency Fund

We’ve been with them for years and love it their checking and savings accounts. They have all the major features we’re looking for with a bank:

  • Covered by FDIC
  • No monthly maintenance fee
  • $0 required minimum balance
  • Free online BillPay service
  • Conveniently located ATMs
  • Earn some interest rate if possible

While they don’t have the highest rates, they’re still competitive and their customer service has been great for the few occasions we’ve had to use them.

Thoughts on Starting an Emergency Fund

Have you had to adjust and move away from credit cards to a proper emergency fund? How have you been able to work as a couple and build your emergency fund?

Photo Credit: Brett L

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  • Thomas

    Hi Elle,

    Right after we got married, my wife and I were hit with a $2,700 car repair bill that we had to use a line of credit to cover. This was our “turning point”… Soon after the large repair, we started our emergency (ER) fund and kept it right at the $1,000 mark until all our debts were paid off. When we reached debt freedom back in December 2010, we decided to up our ER fund to the $10,000 mark, which is roughly three months of living expenses +/- a couple thousand.

    How are we saving for this?

    1. We went down to one car. We got rid of the car that was eating up the most gas and costing us the most in upkeep. We estimate this will save us a good $2,000 to $3,000 a year. Part of this savings will go towards the ER fund, part to the car replacement fund, and part to either our church or some other form of charity. This idea came from Matt Jabs over at http://www.debtfreeadventure.com/ .

    2. We setup a savings plan ahead of time with a pre-determined amount going to the ER fund. Since we live on “last month’s” money (YNAB methodology), we are able to make this transfer on the first of each month.

    3. At the end of each month, we evaluate our budget vs. actual and allocate at least part of the excess to the ER fund.

    4. We are staying put in our tiny 1.5 bedroom house. Even though we just had a baby and could deperately use the extra space (and perhaps a yard), we’ve decided to stay in our current place as long as we possibly can. This is easily save us $1,000 PER MONTH , which, obviously, helps us build our savings at a faster rate.

    5. We budget (as implied above). And we stick to our budget. Sure, little extra things come up here and there, but since we are out of debt, we have more flexibility to cover them (and the ER fund if it’s a true emergency).

    God Bless,
    Thomas

    • Elle

      Thanks Thomas for sharing how you built your savings. I’m a fan of Matt’s blog as well – he’s focused on being debt free and walks the walk.

  • http://www.financialsamurai.com Financial Samurai

    I think we’ve got to move beyond the EF mentality. It’s crippling to our progress. Instead, an EF should be a given, like putting one’s seat belt on, and we should really focus on expanding our income.

    • Elle

      Sam I think that when people rely on credit cards for dealing with emergencies, you can’t take an EF as a given. As one progresses, I can see adjusting your system as it fits your needs.

  • http://afford-anything.com Paula

    I start to feel anxious when my emergency fund gets too low … to me, an e-fund with a balance of less than $1,000 induces the same type of nervousness that a major credit card bill would induce! Setting your “ick” factor to a minimum e-fund level will help ensure you have enough to pay the Mastercard in full, immediately, when your car breaks down.

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