Emergency Fund Vs. Emergency Credit Card

Most all financial advisers and experts, including folks like Dave Ramsey, often express the importance of an emergency fund.  The emergency fund is often a chunk of money set aside to be available should an emergency of an unexpected expense occur.

Recently, I've read several people's thoughts on the idea that an emergency fund isn't necessary since you can utilize a credit card in the event of an emergency.  While this is true, I would definitely recommend against such an approach.

In my opinion, one of the primary purposes of having money set aside for unexpected circumstances is to avoid going into debt when those circumstances occur. By relying on a credit card for these events, you're defeated purpose #1.

Additionally, an emergency fund also serves the purpose of giving you a "cushion" or "buffer" from the expenses of life. Too many people live right on the edge between getting by and not getting by. The emergency fund also helps back away from this edge.

By storing your emergency fund in an interest-bearing account, you can also earn a return on the savings. This income, even if it's minimal, is also a purpose of the emergency fund.

With these reasons clearly stated, I hope you will never rely on a credit card for emergency circumstances.  Instead build up a reserve of cash and keep it untouched unless a real need occurs for these funds.

How Much You Need

Most people suggest 3-6 months and that's a great starting point.  If possible, i'd recommend stashing away up to a year's worth of expenses. That cash is safe, and is not exposed to risks like market volatility.  Having a year's worth of expenses on standby is an excellent form of security and financial stability.