Is a credit card a good replacement for an emergency fund?

One of the most important things about personal finance is having the right foundations to build on for the rest of your money.

Most personal finance experts would agree that an emergency fund is a very useful thing to have. Living on the edge with your money is not a good idea – living from pay check to pay check can be very precarious if you have an emergency.

Therefore, having at least $1,000 set aside is a good idea. Maybe it’s a good idea to have three months of living expenses set aside, which might be $6,000, $10,000 or more.

But, cash is one of the worst investments over the long-term. So imagine how much wealth you might be giving up if it’s sitting in cash rather than compounding at higher rates with assets like shares or perhaps property.

Of course there’s nothing like having the safety of cash. It might help you sleep at night and for at least 90% of the population I think having the cash set aside is a good idea.

But, what about a credit card instead of an emergency fund? Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) would certainly prefer you to have a credit card!

If you could have a credit limit there to utilise instead, but only use it for emergencies, then your cash could be used for other sources. If you had an emergency fund and had an emergency then you’d rebuild the fund as soon as possible. The same could be said with an emergency funded by a credit card – you’d pay that down as soon as possible.

Ultimately, I don’t think relying on a bank to provide your funding in an emergency is the right way to go, even if it looks better on a spreadsheet. I’d personally rather have cash in the bank.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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