During moments in our lives we are faced with bad luck or simply things that go awry and inevitably cost us money. From a car needing repairs to the water heater going out, or an unexpected doctor bill we don’t plan for these to happen, but we can in place in case they do.
As financial planners we generally recommend that our clients have emergency funds in the event that such events are going to happen. On different occasions I will get the argument that an emergency fund isn’t necessary if one has a credit card to simply pay for the unplanned expenses when they happen.
Generally, in an emergency a credit card can come in handy as one may not have quick access to cash, etc. However, the flaw with thinking that a credit card can be used in place of an emergency lies here: How do you pay off the credit card?
The point is that the emergency may go away, but the credit card debt remains and the interest compounds not only the money used but the headache of the emergency the card was used to fund. Several emergencies in a small period of time can lead to high credit card debt – which is an emergency itself; only this emergency is preventable.
One thing folks can consider is to utilize both if necessary. In a pinch a credit card can come in handy if an unexpected emergency happens out of town, or as mentioned previously you don’t have immediate access to your emergency fund. The solution lies in once you have access to your emergency fund use that money to pay off the credit card that you just used for the emergency, and work on replenishing your fund.