Emergencies: Money Market vs. Credit Card

I know some pro-debt people, some anti-debt people, and people who don't have a side. I am anti-debt, and despite my tone in some previous posts, it is not because I think lenders are evil and borrowing is morally wrong. We choose to not use debt because anything they can give us, we can give ourselves. Usually better, cheaper, and with less hassle.

When thinking about getting rid of their credit cards, a lot of people ultimately hesitate because of the thought of emergencies. In a pinch, they have instant access to a few thousand dollars, graciously provided by their credit card company. What's the harm?

When I am faced with complicated or even simple mathematical arguments that "prove" certain financial decisions are smarter than others, I always remember that there is a human being who actually has to execute the "smart" financial plan. And even if I only had my own behavior to judge from, I know that the human being will find very innovative ways to mess it up.

My stance on the issue of emergencies is to first get rid of debts. The monthly cash flow that you free up will go a long way in taking care of the little emergencies. Then, create an emergency fund. Put a few months worth of expenses in an money market account. If your credit card makes you feel safe, then put an amount equal to your credit limit in there. Except now, somebody is paying you interest instead of vice-versa.

I acknowledge that there are smarter financial investments for that cash. But I still am a fan of the emergency fund instead of credit cards.

First, if you have sacrificed to save all that money up, your definition of "emergency" will forever be different. You will not want to part with that money easily! For all but the worst emergencies, you will find creative ways to take care of things, such as with cash flow or modified budgets.

In contrast, that credit card sure is easy to use. And everything is an emergency.

Second, many emergencies arise because of poor planning. Again, the fact that it's your cash will give you an entirely new perspective. You will save up the money for new clothes this summer. And that trip. Summer comes every year; don't be surprised to see it. But when we don't plan, we do get surprised by many things like this.

Third, while many people tell me that the smart financial investment is to put my money in the stock market and keep the credit card around, I do have other money that is invested, in retirement accounts and otherwise. To me, the emergency fund is a different kind of investment. To the extent that having some money in the bank can provide peace and security, it provides peace and security. And there are a lot fewer things for me to mess up.