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Myth buster: Do I need an emergency savings fund?

Illustrated hand holding a credit card

Myth: I don’t need an emergency savings fund. I have credit cards or a line of credit.

Certainly, it’s an option to use your credit card or access the line of credit when an emergency comes up. But it’s not necessarily a wise one, and it’s also one that could put you further in debt, says Mallory Grant, senior personal banker at Thrivent Credit Union.

“It’s easy to fall into the habit of swiping a card or paying online, and then an emergency medical bill or car repair comes along, and your credit card bill at the end of the month is much higher than you expected,” Grant says. “If you don’t pay it off, the interest is going to begin to add up.”

It’s like taking out a loan for an emergency. And if another emergency comes up before you’ve paid off the balance, it can snowball on you, she says, and send your finances out of control.

Also, Grant says, while it may be convenient to use your card, it could have an impact on your credit score. If you keep a balance on your credit card of more than 30% of your credit limit, your score could go down, and negatively affect future interest rates if you need a new car, mortgage, etc.

Similarly, with a line of credit, you’re immediately paying interest on money you’re borrowing.

Saving money is hard, but it’s also harder to do if you’re making payments on credit card debt, Grant says. If you have an emergency fund, you can simply pay the unexpected bill. Then instead of making a credit card payment, including possible interest, you can put it back into your emergency savings, where it’s likely earning interest.

The real question Grant asks in this scenario is: Do you believe an emergency fund isn’t necessary, or do you believe you don’t have enough money to create one?

“People often will say they don’t make enough to have an emergency fund, but that’s a misconception,” she says. “You don’t need to start out putting $100 a month in it; start with $10. Go out to eat one less time. Start somewhere—even if it seems small.”

Setting up automatic transfers or direct deposits to a savings account is a way to make the habit stick. The fund can grow without any decision-making effort from you, even with the smallest contributions.

Ultimately, depending on credit cards or a line of credit to pay for an unexpected repair or bill isn’t the best financial move.

The more prepared you are for the emergencies you will encounter, the more confident you may feel about the future. Talk with your financial advisor about ways to maximize your savings goals.

Deposit and lending services are offered by Thrivent Credit Union, the marketing name for Thrivent Federal Credit Union, a member-owned not-for-profit financial cooperative that is federally insured by the National Credit Union Administration and doing business in accordance with the Federal Fair Lending Laws. Insurance, securities, investment advisory and trust and investment management.