3287: Should You Rely On Credit Cards For Your Emergency Fund? By Michelle Schroeder-Gardner

Summary

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Optimal Finance Daily – Episode 3287 Summary

Should You Rely On Credit Cards For Your Emergency Fund?

Article by Michelle Schroeder-Gardner | Read and discussed by host Diania Merriam
Date: September 18, 2025

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Episode Overview

In this episode, host Diania Merriam explores an increasingly common question in personal finance: "Should you rely on credit cards for your emergency fund?" Drawing on a blog post by Michelle Schroeder-Gardner (makingsenseofsense.com), the show breaks down the risks and considerations around using credit cards as a financial safety net, highlights the advantages of a cash-based emergency fund, and reflects on psychological and practical pitfalls associated with debt.

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Key Discussion Points and Insights

1. Current Trends & Statistics

(00:58 - 02:00)

• Diania introduces the topic, noting a growing trend of families relying on credit cards instead of cash savings for emergencies.
• "26% of Americans have no emergency fund whatsoever."
• Only 40% of families can cover three months of expenses; even fewer have the recommended six months’ savings.

2. Assessing Your Financial Situation

(02:00 - 03:00)

• Emergency fund needs vary based on job stability, income vs. expenses, homeownership, health status, etc.
• Quote:
  "The riskier your situation, the larger the emergency fund you'll most likely want."
  — Michelle Schroeder-Gardner [02:15]

3. The Risks of Credit Cards as Emergency Funds

(03:00 - 04:15)

• Relying fully on credit cards increases financial risk, particularly if you lose your job or face multiple emergencies.
• High credit card interest rates (often 25%+) can add substantial cost if balances aren't paid off right away.

4. When Might Credit Cards Make Sense in Emergencies?

(04:15 - 04:55)

• Rare exceptions: Those who can fully pay the balance immediately or are aggressively eliminating high-interest debt.
• Still risky if income is disrupted.
• Quote:
  "What would happen if you relied on credit cards but lost your main source of income? It would lead to a lot of credit card debt. Unmanageable credit card debt."
  — Michelle Schroeder-Gardner [04:35]

5. Why a Real Emergency Fund is Important

(04:55 - 06:15)

• Losing your job: Even stable jobs are never 100% secure.
• Poor health insurance: High deductibles (e.g., $12,000/year) can quickly turn minor incidents into financial crises.
• Car/home repairs: Unpredictable and often expensive.
• Other unforeseen expenses: Pet care, travel due to family illness, etc.
• Peace of Mind:
  "An emergency fund is always good to have because it can give you peace of mind if anything costly were to happen in your life."
  — Michelle Schroeder-Gardner [06:05]

6. Practical Takeaways: Start Small, Build Up

(06:10 - 06:20)

• Still better to have $500–$1,000 than nothing; small buffers can cushion many minor emergencies.
• After establishing a starter fund, focus on paying down high-interest debt.

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Host Reflection: Debt Mindset & Money Management

(07:36 - End)

• Diania shares personal experience from her twenties:
  • Had the belief that a higher future income would eventually solve her credit card debt—this proved untrue.
  • Observes that increased income doesn't equal better money management.
  • Quote:
    "Many of us have the erroneous belief that more income will solve our money management issues, but we don't magically become financially savvy just because we have more money."
    — Diania Merriam [07:49]
• Cites statistic: 70% of lottery winners are broke within five years, regardless of winnings.
• Remarks on psychological aversion to lowering one’s bank balance, which drives credit card use “to keep cash untouched.”
• Warns: Compound interest on credit cards can cause “a manageable amount of debt in the beginning [to] explode into a pile of debt that would stress me out.” [08:37]

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Memorable Quotes

• "The riskier your situation, the larger the emergency fund you'll most likely want."
  — Michelle Schroeder-Gardner [02:15]

• "What would happen if you relied on credit cards but lost your main source of income? It would lead to a lot of credit card debt. Unmanageable credit card debt."
  — Michelle Schroeder-Gardner [04:35]

• "An emergency fund is always good to have because it can give you peace of mind if anything costly were to happen in your life."
  — Michelle Schroeder-Gardner [06:05]

• "Many of us have the erroneous belief that more income will solve our money management issues, but we don't magically become financially savvy just because we have more money."
  — Diania Merriam [07:49]

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Notable Moments & Timestamps

• [00:58] Episode topic introduction
• [02:15] Assessing personal risk and emergency fund size
• [04:35] Pitfalls of losing income while relying on credit cards
• [06:05] Psychological benefit: peace of mind
• [07:49] Host reflections on income vs. money management and lottery winner stats

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Final Takeaways

• While using credit cards for emergencies is tempting, it is fraught with risks—most notably, high interest and increased debt burden.
• A cash-based emergency fund, even if small, is dramatically better than none at all.
• Real financial security comes not just from income, but from sound money management and preparation for the unexpected.

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Transcript

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That's why you Rack this is Optimal Finance Daily should you rely on credit cards for your emergency fund? By Michelle schroeder gardner of makingsenseofsense.com lately I've been hearing more and more about families relying on credit cards for their emergency savings fund. This is something that scares me as while credit cards may work for some, I believe that emergency savings funds are a better solution for the average person. Whatever emergency fund amount you decide on, it's better than nothing in my mind. As I stated in the article, everything you need to know about emergency funds, 26% of Americans have no emergency fund whatsoever. Also, only 40% of families have enough in savings to cover three months of expenses, with an even lower percentage having the often recommended six months worth of savings. There are many things you should think about when it comes to whether or not you should use a credit card as your emergency fund. Number one, what's your financial situation? Different people need a different emergency fund amount. Some of the things you'll want to think about when determining your emergency fund amount is the stability of your job, your income when compared to your expenses, whether you own a house and or a car or not, your health and more. Basically, the riskier your situation, the larger the emergency fund you'll most likely want. If your situation is quite risky, then using a credit card for your emergency fund will be a bad idea because there's a large chance you'll rack up credit card debt that you're unable to pay off whenever an emergency arises. How much risk are you willing to take on? By relying entirely on credit cards, you're going to be taking on a lot of risk. You never know if something will come up, how big the expense will be, and and whether or not you'll have enough credit to fund the expense. Plus, the interest rate on your credit card may hover somewhere near 25%, which can make for an expensive bill if you're unable to pay your credit card bill before interest accrues. And number three, when does using a credit card for your emergency fund make sense? Now, I understand that different techniques work for different people. There are situations when using a credit card for your emergency savings may not be a completely bad idea if you know that you can pay off a large expense within one month, such as if you have a large income but a low level of expenses. If you have a lot of credit card debt at high interest rates that you're trying to pay off, your money may be put to better use by paying off your debt first and so on. However, the problem with this thinking is what happens if you lose your job. Many have emergency funds that exist so that they can support themselves if they were to lose their job. What would happen if you relied on credit cards but lost your main source of income? It would lead to a lot of credit card debt. Unmanageable credit card debt. Having a real emergency fund can be much more worthwhile. There are many other reasons to have a fully funded emergency fund. Number one, an emergency fund can help you if you lose your job. No matter how stable you think your job is, there's always a chance that something could happen where you need money fast. Number two, an emergency fund is wise if you don't have great health insurance. This is another reason why we have a well funded emergency fund. We don't have the greatest health insurance with our deductible being over $12,000 annually. Having an emergency fund can help protect us if something were to happen to either of us. Three, an emergency fund is a good idea if you have a car. You just never know when it may need a repair. Number four, an emergency fund is a need if you own a home. One of the lucky things that homeowners often get to deal with is an unexpected home repair. Number five, an emergency fund can protect you in many other areas as well. This can include if you have a medical cost for your pet. If you have to take time off of work for something, you need to go somewhere far to visit someone who's sick and so on. And number six, an emergency fund is always good to have because it can give you peace of mind if anything costly were to happen in your life. Instead of building onto your stress because of whatever has happened, at least you know you can afford to pay your bills and worry about more important things. As you can see, there are plenty of positives of having an emergency savings fund. However, I know that different things work for different people and that some prefer to use credit cards in the case of an emergency. What do I think? I think everyone should have some sort of emergency savings fund. Even if you can only manage $500 to $1,000 right now, that's better than nothing. $500 to $1,000 can still most likely help you buy for at least a little bit. Plus you can still put money towards high interest rate debt after you build up your specific emergency fund amount. My problem with using credit cards as your sole source for an emergency fund is that it may lead to more debt in some situations. You just listened to the post titled should you'd rely on credit cards for your emergency fund? By Michelle schroeder Gardner of makingsenseofsense.com this.

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I think the main concern of using a credit card as an emergency fund is that it can be a slippery slope. Many people put debt in the category of death and taxes. They believe it's just a necessary part of life. But this isn't true. It's totally possible and definitely preferable to be debt free, especially if it's high interest Credit Card Debt When I think about my mentality when I was charging up my credit card and digging a debt hole in my twenties, I recall this belief that I would be able to pay this off easily in the future when I was making more money and then I made more money and that had no effect on my debt. I think many of us have the erroneous belief that more income will solve our money management issues, but we don't magically become financially savvy just because we have more money. Take lottery winners for example. Whether they win 500 million or 1 million, but 70% of Lotto winners will be back in the same financial position they were in before they won in five years or less. This is a pretty compelling statistic that demonstrates that money management trumps income. Another thing I noticed about accumulating credit card debt is that more often than not, I had the cash to pay for things, but I hated seeing the balance in my bank account decrease. So I put purchases on a credit card and paid the minimum. I didn't understand that compound interest was working against me and what seemed like a manageable amount of debt in the beginning was going to explode into a pile of debt that would stress me out. So when you're considering using credit cards for emergencies, remember that the compound interest that will accumulate can make this emergency much more difficult to manage. That'll do it for today and another installment of Optimal Finance Daily. Have a happy Thursday. Thank you for being here every day and listening, and I'll see you on the Friday show tomorrow, where your optimal life awaits.