We have all been told that having a little extra money saved is crucial in order to avoid the occasional mishaps, accidents and sudden emergencies that occur in life. If you suddenly find yourself out of work, facing sizable medical bills or otherwise are limited in your financial capacity, it will not take long before those events cause financial devastation for you and your family.
Most financial advisers recommend having enough money to cover six months of expenses, but fewer than 25% of Americans meet this threshold. Some think that access to a credit card is equally acceptable, but this is not the case. Below, we will discuss why a liquid emergency fund is superior to credit when the worst-case scenario occurs.
You Avoid Debt
The biggest advantage that an emergency fund has over any emergency credit cards is the fact that you will not have to accrue any additional debt in the midst of a bad financial situation. Most likely, the need to access an emergency fund is a response to avoid any more debt that might be incurred due to a bad financial situation, which is exactly what the emergency fund is intended to do. Some people may only find themselves in a tight situation for a couple of months, so having the ability to cover regular expenses for a period of time will help you keep your finances in relative good order while the situation unfolds.
You Avoid Interest Charges
Much like was mentioned prior, emergency funds exist to prevent the accumulation of additional debt in tough times. While access to a small line of credit is a good idea when the largest of unexpected expenses arise, the use of a credit card comes with some key disadvantages – like interest. If you want to stay out of debt during a financial downturn, then the use of a credit card is counter-intuitive to this strategy: in most cases, you are shifting debt from one source to another and accumulating additional debt via the interest charges. This is not as big of a worry if you have access to a credit card with 0% APR, but most people hold credit cards that do have higher APRs attached.
You Have Flexibility
Not all entities accept credit cards as a form of payment, and there may be recurring bills in your life that require upfront cash or an equivalent in order to be paid. Those who need cash can often obtain this via their credit cards, but the associated fees from doing so can add up quickly.
Many credit card companies charge in excess of three to five percent for a cash advance, which again, adds more debt that would otherwise be unnecessary with an emergency fund. The flexibility that an emergency fund offers means that you will never have to struggle with these decisions nor worry about additional expenses being incurred during a tough time.
While access to a credit card for emergencies is recommended, it is highly important that any credit card owner also strive to have an emergency fund on-hand that is independent of this. By doing so, you can ensure that as little debt as possible is accrued during financially-challenging times and rest easy knowing that you have a debt-free solution to handling any unexpected issues.