The importance of having an emergency fund can’t be overstressed. Living without an emergency fund is like walking across a high wire without a safety net. One little slip and you can fall into a financial black hole. Unfortunately, setting up an adequate emergency fund is neither fast nor easy, as most Certified Financial Planners suggest having at least a three to six month fund, while others suggest eight months to a year for certain individuals with riskier jobs.
Stockpiling funds to cover a half year’s worth of expenses can take quite a bit of time, particularly for those who have gotten stuck in a paycheck to paycheck lifestyle. And when credit card debt is added to the picture, building an emergency fund can get expensive. That's where the smart use of low interest balance transfers can help ease the costs of building an emergency fund.
Credit Cards Are Not an Emergency Fund
Before the credit crisis erupted, many people looked to their credit cards as their emergency fund. This idea of the credit card safety net quickly evaporated during the recession, as credit card companies embarked on a spree of rate increases and credit limit cuts that left many people stuck with expensive debt and barely enough credit to buy a tank of gas, let alone cover a real emergency like a costly car repair.
Due to the unreliability of credit cards, available credit shouldn't be viewed as available funds for an emergency. In 2010, many people who paid down their credit card balances to reduce interest expenses and free up available credit to use in emergencies saw their credit limits decreased immediately. This left those individuals without cash or credit.
Thus, while paying down credit cards should be a major priority for anyone with this type of debt, doing this in order to create a credit card safety net is not a good way to prepare for financial unknowns as available credit can disappear when it is needed most.
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Credit Card Debt Increases the Cost of Creating an Emergency Fund
Carrying an average monthly balance of $3,000 on a credit card may not seem like much, but at a 15% interest rate, the annual cost of carrying this debt is over $400. This creates a difficult situation for people with credit card debt who lack emergency funds. Allocating $3,000 towards credit card payments will go a long way in reducing interest expenses, but using cash to pay off credit cards can delay the building of an emergency fund for months and leave you vulnerable in the event of a financial emergency.
Using Balance Transfers to Help Reduce the Cost of Creating an Emergency Fund
Balance transfers can go a long way in reducing the cost of carrying credit card debt while building an emergency fund. With 0% balance transfer credit cards, it is possible to move high interest credit card debt to a new card that does not charge interest for one year (and occasionally longer).
During a balance transfer, the money you put aside for emergencies instead of paying down debts won't cause your debt to increase since you will not be paying interest. This sharply reduces the expense of carrying credit card debt while building an emergency fund, making the decision to save significantly easier.
The Next Steps
While the use of a 0% APR balance transfer can provide significant savings on interest during the building of an emergency fund, 0% rates only last for a limited time. Once they end, standard credit card interest rates kick in.
Fortunately, by this time you will have had at least a year to build up a nest egg. With this emergency fund established, it will likely be time to turn your attention to clearing up high interest debt. If you have good credit, you may be able to do a second balance transfer and focus on paying down your credit cards without interest expenses. But if you can't secure another 0% deal, simply approach getting out of credit card debt with the same focus that helped you successfully create an emergency fund.
Jeff Weber has been writing about the credit card industry since 2004. He is a former contributor to Forbes and currently blogs about saving money with 0% balance transfer credit cards at www.smartbalancetransfers.com/blog. Jeff is not endorsed or affiliated with LPL Financial.
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