An Unconventional Emergency Fund: Credit Card Reward Points

With all the uncertainty in the world right now due to the COVID-19 pandemic, many people are either bulking up their emergency fund, wishing they had an emergency fund, having to dip into their emergency fund or wondering what the hell an emergency fund is?

An emergency fund is money set aside for unexpected financial situations that you cannot afford to cover with your normal income. These are things that you have not or could not have budgeted for. These unexpected situations can be anything from your furnace breaking in the middle of winter to a car accident to losing your job.

There’s a lot of different literature on emergency fund guidance. Some people say you should have a certain dollar amount saved, while others say you should save 3-6 months of expenses. One common theme amongst emergency fund literature, however, is that the funds should be set aside in some sort of bank account. My husband and I, on the other hand, take an unconventional approach for our emergency fund.

We use our credit card rewards points as an emergency fund

While credit card rewards are not as liquid as funds in a bank account, most expenses can be paid with a credit card. And if you’re like me, you pay for as much as you can with your credit card in order to maximize reward points. The question then becomes, what do you do with all those reward points? My thought: why use them if you don’t NEED to?

Between the two credit card rewards programs we have a combined total of $12,584.33. We have about $3,000 of necessary expenses per month, including mortgage, taxes, insurance, electricity, water/sewer, gas, phone/internet/cable, groceries and pharmacy expenses. That means in just credit card reward points alone, we have over 4 months of expenses saved up.

Maximize reward points with multiple credit cards

To give a little background as to how we have accumulated over $12,000 in rewards point, we utilize 3 credit cards that all offer different rewards benefits: Chase Freedom®, Chase Sapphire Reserve®, and American Express Blue Cash Preferred®. A little bit more about each of these below.

The American Express Blue Cash Preferred Credit Card offers 6% cash back on grocery stores and streaming services, 3% cash back at gas stations and on transit, and 1% on everything else. These reward dollars can be used as a statement credit, gift card purchase or to purchase specific products.

The Chase Freedom Credit Card offers 5% cash back on alternating categories throughout the year on top of 1% cash back on everything else. The 5% categories rotate each quarter. For example, one quarter may be 5% cash back on drugstores and grocery stores, while another quarter may be 5% cash back on gas stations and Amazon purchases. I combine all of my rewards for this card with those from my Chase Sapphire Reserve.

Chase Sapphire Reserve is a great card for food and travel. This card offers 3% cash back on all travel and food. The real perk of these reward points is that they can be used for 1.5 times the value of the points when points are used to book travel through Chase Ultimate Rewards (i.e., 50,000 points is equivalent to $500, but when redeemed for travel through Chase Ultimate Rewards it equals $750).

As of March 19, 2020 we have $5,014.48 in rewards dollars with American Express and 756,985 Chase Ultimate Rewards points which is equal to $7,569.85 as a statement credit or $11,354.78 if redeemed for travel.

If you’ve been following my blog for a while, you may remember my post Why I Didn’t Use Travel Hacking for my 3-Week Vacation. Before my daughter was born, we spent a lot of time and money traveling and eating out, therefore racking up lots of points. We always planned to save up those travel points to bring our future children to Disney World or other vacations as a family. While I hope we can still do that, the real reason we’ve kept these points rather than redeeming was to have them as a backup plan in case we really needed them. While vacation may not be a necessity, our thought is that if we have a savings account being used for vacation funds but an emergency comes up, we would likely use that fund to cover the cost of the emergency and still potentially be able to go on vacation due to the points we have accumulated.

Credit Card Rewards = Free Money

The great thing about thinking of your credit card rewards as an emergency fund is that if you use your credit cards correctly, meaning only charge what you can afford to pay for in full, then you have accumulated an emergency fund without having to put any actual money aside. Much like using a savings account for an emergency fund, it takes time to accumulate credit card rewards; however, one other advantage of using credit card rewards for an emergency fund is that many credit cards offer bonuses for opening a new card. For example, The American Express Blue Cash Preferred is currently offering $250 cash back with a new card when you spend $1,000 in the first 3 months. That’s essentially a free boost to your savings for just spending money you would have spent anyway!

Disadvantages to Reward Points as an Emergency Fund/Back Up Plan

Rewards points can be used as a statement credit, but they are not actual cash. So, while many expenses can be paid for with a credit card, there are a few that cannot be, such as a mortgage. However, being that we have over 4 months of expenses saved in credit card rewards and that our mortgage is just $837 a month, we do not think this is an issue. Furthermore, our credit card reward points are not the ONLY means we have as a safety net.

I would be remiss to say we don’t have any other accounts that could be used as emergency funds. If you’ve read my post about the Putnam County Savings Bank mutual conversion and the money we made from our investment, you’ll know that we planned on using some of the earnings from that investment to put money in more mutual banks in hopes of being able to participate in more mutual conversions (for more information on how you can be a part of an IPO, please read here: How to Use Mutual Banks to Increase Your Returns). We have $23,500 in 20 different mutual bank accounts (Certificates of Deposits) throughout the U.S. While these funds COULD be withdrawn at any time (with a small penalty) in case of an emergency, that is not their sole purpose and we would use the credit card reward points before we consider withdrawing from these accounts.

Emergency funds are extremely important and the current state of the world drives that point home even more. However, emergency funds do not necessarily need to be in a bank account. Credit card reward points, while unconventional, are a great option for an emergency fund account, especially if you are tight on cash. Everyone’s financial situation is different, though, so if you personally have to pay many expenses in cash, please take that into consideration when figuring out what type of emergency fund works best for you.

Do you have credit card reward points? Would you use them as an emergency fund?

3 thoughts on “An Unconventional Emergency Fund: Credit Card Reward Points

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  1. Interesting concept. We have a ton of credit card reward points but never thought of converting them into a dollar figure.

    Because the conversion to state credit is one of the worst conversion rates we save our points for travel. To get more bang for our buck.

    That being said in an emergency like we are currently experiencing travel is off the table so those reward points could provide a good cushion if we absolutely needed to use them.

    1. Great point about traveling being off the table with the current state of the country/world. We all hope that we won’t experience anything that requires us to dip into our emergency funds, regardless of what form they are in, but you really never know.

      I completely agree about travel, though. I do hope we get to use our Chase points for travel one day. Our Amex points, on the other hand, will be the same dollar amount regardless of what we use them for.

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