Access to credit vs. emergency savings

[Lephturn]

You are doing what you are comfortable with, which is always important.

That said... I would personally do the opposite. I don't put a dime into my mortgage until RRSP, TFSA, and RESP for the kids are all maxed. I'm in variable mortgages (2 properties) paying 2.1% interest. My payments are set as if I was in a 4.5% fixed mortgage, so I am already accelerating the payments to substantially, but anything extra goes to tax sheltered investments before they go to paying down debt that's running at 2.1%

In terms of credit vs. emergency savings, I do have a HELOC available for that purpose, as well as a higher interest unsecured LOC. Assuming you have the discipline not to dip into the LOC so that it is available for a real emergency, I think that makes sense.

I am unlikely to pay down debt at 2.1% - I am comfortable that I can beat that return handily investing, so it wouldn't make sense. If interest rates get much higher, that would change - and I can always take any unregistered investments and pay off the debt in the future if it makes sense to do so.

[dogcom]

Be your own master as suggested and protect yourself with cash in an emergency fund. Gambling on a LOC is fine if you want to but just remember it is still a gamble of some sort. No one can be trusted, bankers included so you must rely on yourself for almost everything when it comes to money.

So always start with a trust no one stand and that way you will check everything and everyone out so you don't get screwed in life. This is the angle I use so in my case I would have emergency cash on hand and would maybe use my LOC first and then my emergency money to hold out as long as possible if disaster hits me.

[andrewf]

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.

HELOCs can be dangerous in the hands of people who don't make good decisions. The problem here was bad decision-making, not the line of credit. It would have been a really dumb decision if it had been cash, too.

[Cal]

I would rather pay off the mortgage 10 months earlier. And use the HELOC as the emergency fund, no emergency, no interest. If you are putting and extra 1K ion your mortgage every month, you obviously have some financial responsibility.

I would use the HELOC for investing when the mortgage is paid off, but that is just my comfort level. And I personally wouldn't use all of the HELOC that the bank is offering, maybe only 1/3 of the property value. I err on the side of caution when it comes to debt.

[Eclectic12]

HELOCs can be dangerous in the hands of people who don't make good decisions. The problem here was bad decision-making, not the line of credit. It would have been a really dumb decision if it had been cash, too.

Agreed ... though there is one difference. It it had been cash, they'd have been out the cash. With the HELOC, there's the interest on top of the cash.


Cheers

[cannon_fodder]

People spend heloc like it is their cash and forget you are going in the hole when you use it.

Some people. And that is why the OP's strategy is risky with many people yet defensible in certain situations.

I've never created an emergency cash pile. Here are some factors I consider:

- have you had a long history of continuous employment with income that at least keeps pace with inflation?
- do you have a 2 income household and is there a low correlation between your jobs' stability?
- are your non-discretionary household expenses less than either of your incomes?
- do you have significant assets that are relatively liquid (e.g. held in TFSAs, non-registered accounts)?
- are you unlikely to add children to your family in the near term?

If you take the approach that a LOC is better than an emergency fund, you still may want to have funds set aside for: annual vacations; house repairs; replacing a vehicle, etc. These types of expenses may occur regardless of whether you lose or significantly reduce your job income. Personally, I separate an emergency fund (up to six months of non-discretionary expenses in case of job loss) vs. planning for anticipated expenses that can be somewhat predictable, even scheduled.

Having an emergency fund isn't a bad idea. If nothing happens, it wasn't the fiscally optimal solution but there is no way to know that until after.

[MoneyGal]

Nice list and analysis, CF.

[Four Pillars]

Here are my thoughts on emergency funds and my 180 on them:

http://www.moneysmartsblog.com/why-i...mergency-fund/

[andrewf]

I'm not anti-emergency fund. I just doubt rules of thumb that say everyone should have 6 months. Some people might need more, others less.

Most people having working cash. My working cash usually amounts to three or four months of my non-discretionary spending, so I have an emergency fund despite not really trying. I have no debt and I have a high savings rate that I use to contribute to RRSP and TFSA. In the event that I need money, I can raise some from TFSA (it is not verboten to sell longer term assets--it's just there's a chance that when you need the cash it may be inopportune to sell), or borrow cheaply. I don't have dependents. I'm a case study in someone who doesn't need much of an emergency fund. I can definitely envision a time when that might not be the case.

[Sampson]

Most people having working cash.

Is it a little geeky to think of this as operating capital? My wife rolls her eyes whenever I refer to our family 'revenue'.