I want to throw something out there that many won't agree with, but I'd like to hear your thoughts. I am very open minded about this.
We have access to a substantial line of credit because we have significant equity in our home. Additionally, rather than build up a big savings cushion for one-time costs we throw extra money against the mortgage every month. The numbers aren't exact, but for the sake of arguement it is $1000 a month and every inflated payment takes an additional month off the mortgage of about the same.
If I had a one-time emergency of $10,000 and I were to put it on the LOC and carry it for a year it would cost less than $400 in interest charges.
If I put $1000 a month into an emergency fund for 10 months, it would extend my mortgage by 10 more months, costing me $10,000 (give or take).
You'll notice I'm not advocating not saving at all (we do have retirement, education, other savings), but pointing out that we all need to think about our own personal situations, particularly when receiving advice from others. Likewise some will also point out that if my $10K were invested in a HISA, or other very safe, accessible product, then it would actually be growing, not sitting gathering dust. Also true. There are some other assumptions, like I could pay off the $10K in a year (likely) and would choose to do so (also likely) and would not be directing that money elsewhere, including against the mortgage had the emergency not occurred (who knows?).
The reason we do it? We're comfortable with it. The same reaon we're not levereging the LOC to invest. Not that comfortable at this stage in life, but very confortable with the idea intellectually.
I post because just as we need to consider our own situation in receiving advice. We could also look at our own assumptions before dispensing it because what works for you, might actually be worse for me.
I have heard the savings argument several times and it never spoke to me.
I have always relied on home equity as my cushion. Now that the house is paid off, the l/c still sits there with about 50% of my house's value available. A few years ago, I was sitting around a picket line with coworkers and they were saying how long they could go without a paycheck. Most were talking weeks...I said nothing because the figure in my head was about 7 years. -as long as I calculated the home equity would support me until the house was fully mortgaged again (75%)
Banks are public companies with a responsibility to their share holders to seek good business. They aren't going to refuse to lend me money on this house.
Every situation is different. I don't know what type of lines of credit banks just close up on people... maybe If you live in a remote area, or a mining town with a resource that is no longer valuable. The kind of thing where much of the home's value could vapourize.
But if someone has, say, a brick bungalow on a bus route in suburban GTA, seems to me any bank would jump at a line of credit if it is a first mortgage.
The only reason i sit on so much cash is that we have 5 rental properties , if i only had one house and cottage I probably would not feel the need for so much cash on hand.But we have always as long as i can remember have about 1 months expenses in physical cash on hand.
I know a mortgage and a line of credit are two different beasts, but I agree with the OP's strategy. Essentially, you are opting to pay off debt quickly, which means the worst that can happen is if you have a $10,000 emergency and you draw on your line of credit, you simply return to where you would have been prior to paying extra on your debt.
If your mortgage was paid in full and you were fully debt free, I might say it's a better idea to have cash on hand rather than rely on access to credit in emergencies, but what you are doing is rapidly paying down debt, and if an emergency happens to come up, you'll have greater borrowing capacity anyway.
The only danger in relying on a LOC for an emergency is when that emergency effects your ability to earn income, in this scenario you lose the ability to make payments on that borrowed money..... at the very least increasing interest payments you'll pay on that debt, at worst making you lose your asset (house)
Yes, racking up debt at the same time as you've lost a major source of your income is a very bad idea. After the crisis passes, it will take you several years not only to pay back that debt but also to build back any reserves you may want to have.
But more generally, I have a problem with this because it means YOU are not in control of your finances. When you have money saved in the form of liquid assets (cash, TFSAs, cashable GICs, physical currency in the mattress etc), YOU are in the driver's seat.
I also have a problem with paying interest to borrow money that is essentially mine (as in the OP's case of borrowing against home equity).
A friend of mine went through a divorce several years ago. The moment the bank found out, they yanked out his LOC from under him so he couldn't borrow.
So while I understand what the OP is saying, I simply cannot accept the justification offered for not saving money during good times, to prepare for the bad times.
^ Of course, people who maintain cash hoards will have lower retirement savings, all else being equal.
What I mean is your choice for a given level of income and consumption is small cash reserve and greater long term investments, or big cash reserve and less long term investments. To the extent there is a spread between cash returns and long term investment returns, that spread times the cash hoard is your annual 'cash pile insurance fee' in foregone invesment return. If you have a low probably of losing income, etc. it's probably more sensible to err on the side of more long term investments. If you have highly uncertain income, such as a contractor or other self-employed, it might be quite sensible to keep significant amounts of cash or short-term bonds.
A friend of mine took a $50,000 HELOC to max her RSPS then she got married a year later to a man who had no money of his own and who had a house that needed serious work before they could sell it.She went to her Heloc and put $80,000 into his house then to find out his son was also on title .Now the son won't sign to get house sold and she is paying interest and all the payments on $130,000 HELOC .People spend heloc like it is their cash and forget you are going in the hole when you use it.
I am planning to do as the OP is describing. I have a year's worth of living expenses in cash, and from now on any monthly surplus will be put towards the mortgage. The goal is to be debt free in 3-4 years so we can buy a bigger place (and start the process all over again). In reality we may sell sooner though.