A financial guy on the radio you might know (rhymes with “brave chimpanzee”) recommends certain “baby steps” to financial independence. Step 1 is to save up a $1,000 emergency fund, and then with that extremely limited financial buffer, you move onto Step 2, which is to pay off all your debts. Only after all your debts are paid off do you finally graduate to Step 3, which is to save up a real buffer of three to six months of expenses.
With all due humility, I offer a better approach to this plan.
The idea of the $1,000 emergency fund is fine, but it won’t cover much of an emergency. No doubt he picked a number that was big enough that people would not have to resort to payday loans and such in case of a financial emergency, but small enough that it wouldn’t delay getting to the important goal of paying off debts. But I would prefer to see people with more protection. A $1,000 emergency fund won’t even cover a blown transmission or broken A/C unit.
The three to six months of expenses is great, but he recommends that you keep those funds in a money market fund. Terrible idea. His reasoning is that you want your money to be readily accessible, and you don’t want to put it in stocks since the market could take a dive. Fair enough, but whereas money sitting in the market could lose value, money sitting in a money market fund is guaranteed to lose value. The interest rates on money market funds are so low that they don’t keep up with inflation. Your emergency fund would lose value year after year. I think a bond ETF would be a better choice.
But regardless of the place you park your money, the baby steps assume you will dip into those funds in case of an emergency, which means that you are giving up interest or gains during the emergency. Let’s use some real numbers to illustrate the point.
Let’s say you have $50,000 sitting in your emergency fund account. At 2% interest, you’ll earn a thousand bucks for the year; a little over $83 per month. Not a lot of money, but I follow the “would you pick it up off the street?” approach to financial planning. If it’s enough that you would pick it up off the street, then it’s worth taking into account with your financial planning. Better yet, maybe you have your $50,000 in an index fund that earns 4%. Now you’re at $2,000 for the year, or $166 per month. It could be as much as $3,500 if your index fund earns 7%. Hell, the Vanguard S&P 500 ETF gained over 28% in 2019, so that $50,000 might yield $14,000. Now would you pick it up?
Right between the eyes.
But then life, as it always does, hits you right between the eyes. A tree fell on your roof, and the repairs are going to cost $10,000. It’s not covered by insurance, because you were the fool with the chainsaw. How are you going to pay for that repair?
The aforesaid baby step guy would say that you should pull $10,000 out of your $50,000 emergency fund, but that means you will lose the benefit of the investment. If it takes you a year to replenish the $10,000 you took from your investment account, that could cost you anywhere between $200 and $2,800, using the above sample investments. Additionally, you will have diminished your safety net by 20%. If life is really out to get you and chooses that moment to get you fired, then that could make a big difference in how long you can hold on.
The better system is to use someone else’s interest free money for the emergency, and leave your money where it is. That interest free money comes in the form of credit cards that offer 0% interest on purchases for a year or more, which are listed below.
No, no, a thousand time no. You’ll be going into debt.
Dave Ramsey (oh darn, I used his name) would be shocked and aghast, because even a zero percent credit card represents debt. True, but you are going into debt either way. If you borrow from your own emergency fund, you have to pay it back to maintain the fund, and you lose the benefit of part of the fund in the process. Let’s say your finances allow you to pay back the $10,000 at $833 per month for 12 months. As I see it, your choices are completely binary. You can take the money from your fund and lose all the benefits of that money for 12 months, or you can pay back an interest free credit card at no cost, while keeping the benefits of your investment. And I haven’t even included the additional benefits of using a credit card for such a large purchase. Paying for the roof repair with the right credit card could earn you a free flight to Hawaii, whereas pulling the money out of your emergency fund earns you nothing.
If you can’t trust yourself to use debt in this way, then forget everything I’ve said and just take the money from your emergency fund. But consider this. What do you lose? The money is still sitting safely in your emergency fund, and you are free to pay off the credit card in full whenever you choose. The fear would be that you take on the $10,000 of credit card debt, and then something goes horribly wrong and you spiral down into debt until you are living in a refrigerator box. But I submit that you are safer from that refrigerator box if you still have the full $50,000 sitting in your account. You leave yourself with a little more breathing room against the horrible financial death spiral, whatever it is.
The 0% Credit Card Strategy
Using a zero percent card for an emergency is all fine and good, but in a real emergency you won’t have the time to apply and wait for the card to arrive. And besides, emergencies aside, you may just decide to buy something. Blasphemous, I know. It might be time for that gorgeous 80″ OLED television above your fireplace. Don’t go into debt, don’t spend more than you can afford, but also don’t pull money out of savings if you don’t need to. So long as that TV is in your budget, why not buy it with interest free money so you can continue to earn interest on your money?
So, for emergencies and just interest free purchases, it’s a good idea to always have an interest free credit card in your financial arsenal. However, I have yet to see an interest free card that remains interest free forever. The longest I have found is 20 months, and others only offer six months. The trick, therefore, is to pick up an interest free card that stays interest free as long as possible, and get another one in the pipeline before the first expires. After all, if you make an interest free purchase in the 11th month of a 12 month card, you haven’t gained much.
You should change the batteries in your smoke alarms once a year, and some recommend that you pick a date that will remind you to do so. Thanksgiving is a good one. You give thanks for your family and home, and that reminds you that you don’t want your home to burn down, so you replace the batteries. You might want to make January 1st your zero percent credit card day. We look back on the previous year and set goals for the upcoming year. A financial goal may be on your resolution list, and that can remind you to get a new zero percent card in the mix.
But won’t all these new credit cards hurt my credit score?
Some will be concerned that all these new credit cards will somehow negatively impact their credit score. Well, in the first place, it’s not “all these new credit cards.” It’s one card per year. A hard pull for a credit card can drop your score about five points for a few months, and then it goes back up. In the long run, it will likely improve your credit score because the new credit will improve your credit utilization. (“Credit utilization” doesn’t mean that you are running a balance, it turns on when your bank reports the charges made to the card.)
What will hurt your credit is if you use a large percentage of the credit limit of the card. Credit utilization is viewed two ways — the overall percentage used of your total available credit, and the percentage used on individual cards. If you put a $10,000 emergency purchase on a card with a $12,000 credit limit, that puts you at over 83% utilization on that card, and your credit score will take a (sometimes significant) hit. But the good news is that the recovery is almost instantaneous. As soon as you pay off the card, your score will return as soon as the pay-off reports. You can avoid this by getting a business card, like the Chase Ink Business Unlimited, which does not report to your personal credit. It offers only 12 months of zero percent interest, so it is not included on the list below.
Do keep the Chase 5/24 rule in mind. Chase has an informal rule that it won’t issue you a card if you have obtained five credit cards within the past 24 months. If you are a points collector, you don’t want to apply for a lame card if it keeps you from a better Chase card that offers points. Thankfully, there are two Chase cards that offer zero percent for 15 months, so you can implement the zero percent strategy even while working on your Chase strategy.
One of your existing cards may already offer 0% interest.
If you do find yourself contemplating a large purchase or dealing with an emergency, check your existing cards to see if they have any zero percent offers. I have four cards issued by Citibank, and I noticed that one of them now offers zero percent interest on Amazon purchases. I have the option to make interest free payments for 12 months on purchases of more than $300, and for 24 months on purchases of more than $600. And speaking of Amazon, my Amazon card also offers zero percent, but only up to 12 months.
The 0% Credit Cards.
What follows is a list of the top 12 credit cards that offer zero percent on purchases for 14 months or more, all without any annual fees. This list is long enough to get you through more than a decade of interest free bliss. For the next decade, there will no doubt be new cards offering zero percent, or you can work your way through the list again. As of January 24, 2021, all the information below is correct, but credit card terms and offers change all the time, so follow the links to see the current terms. You’ll note that the length of the zero interest period is inversely proportionate to the benefits. The U.S. Bank Visa offers 20 months, but offers few benefits, whereas the Chase Freedom Flex arguably offers the best benefits, but only 15 months of zero percent interest.
- U.S. Bank Visa Platinum Card
- 0% on Purchases for 20 months <— 20 months!
- 0% on Balance Transfers for 20 months (3% transfer fee)
- Notable benefits
- Cell phone protection
- Notable benefits
- Citi Diamond Preferred Card
- 0% on Purchases for 18 months
- 0% on Balance Transfers for 18 months (5% transfer fee)
- Notable benefits
- Purchase protection
- Notable benefits
- Citi Rewards+
- 0% on Purchases for 18 months
- 0% on Balance Transfers for 18 months (3% transfer fee)
- Notable benefits
- 2% on groceries and gas (on first $6k)
- 1% on all other purchases
- Round-up to nearest 10 points
- 10% points back on redemption
- Notable benefits
- Citi Simplicity
- 0% on Purchases for 18 months
- 0% on Balance Transfers for 18 months (3% transfer fee)
- Notable benefits
- None
- Notable benefits
- Union Bank Platinum
- 0% on Purchases for 15 months
- 0% Balance Transfers for 15 months (3% transfer fee)
- Notable benefits
- 0% Transfer fee within 60 days of opening <— 0% balance transfer fee!
- High credit limits for good credit
- Notable benefits
- Chase Freedom Flex <— Best rewards!
- 0% on Purchases for 15 months
- Notable benefits
- 5% cash back on travel purchased through Chase portal
- 5% on rotating categories
- 3% cash back on dining and drugstores
- 1% cash back on everything else
- $200 sign-up bonus
- Notable benefits
- 0% on Purchases for 15 months
- Chase Freedom Unlimited
- 0% on Purchases for 15 months
- Notable benefits
- 5% cash back on travel purchased through Chase portal
- 3% cash back on dining and drugstores
- 1.5% cash back on everything else
- $200 sign-up bonus
- Notable benefits
- 0% on Purchases for 15 months
- Capital One Quicksilver
- 0% on Purchases for 15 months
- Notable benefits
- 1.5% cash back
- $200 sign-up bonus
- Notable benefits
- 0% on Purchases for 15 months
- American Express Blue Cash Everyday
- 0% on Purchases for 15 months
- Notable Benefits
- 3% cash back on U.S. supermarkets on first $6,000
- 2% cash back at U.S. gas stations and department stores
- 1% cash back on all other purchases
- $150 sign-up bonus
- Notable Benefits
- 0% on Purchases for 15 months
- American Express Cash Magnet
- 0% on Purchases for 15 months
- Notable benefits
- 1.5% cash back
- $200 sign-up bonus
- Notable benefits
- 0% on Purchases for 15 months
- Discover it Cash Back <— Use link for $50 Bonus!
- 0% on Purchases for 14 months
- Notable Benefits
- 5% cash back on rotating categories
- 1% cash back on all other purchases
- Unlimited cash back match first year <— Cash back match!
- Notable Benefits
- 0% on Purchases for 14 months
- Discover it Chrome <— Use link for $50 Bonus!
- 0% on Purchases for 14 months
- Notable Benefits
- 2% cash back on dining and gas stations
- 1% cash back on all other purchases
- Unlimited cash back match first year <— Cash back match!
- Notable Benefits
- 0% on Purchases for 14 months