Line Of Credit Emergency Fund

Dec 07, 2012 Comments Off by

Did you hear O’bryan’s law? He said Murphy was an optimist.

One of my favourite personal finance gurus is Gail Vaz-Oxlade. Her financial advice is sound and she had good methods for getting people to follow their own budget. One of her rule of thumbs is to always contribute and top up to a cash emergency fund. She has good reasons to give this advice as people will go back in debt if they need to access funds on a credit card or line of credit.

Adrian of 7 Million 7 Years on the other hand offers the opposite advice. He diminishes the actual chance of needing an emergency fund and encourages the cash that would make this ideal fund to invest it or pay off debt instead.

My emergency fund requirement is BIG compared to most people my age. During the last recession, I learned that when things go wrong, they all go wrong at the same time. At the worst of it, I went through a layoff at the same time of having to evict tenants. All my cash was tied up in real estate and I needed extra cash to keep me afloat during the vacancy. Tenants had done damage that required to be fixed, hence the eviction. I had loads of student debt on top of that. Going through this hardship was my best lesson which is to have a conservative emergency plan if this is to happen again.

After all of this, I still tend to side with Adrian’s advice except that I emphasize the requirement to have a BIG emergency fund based on one’s own liabilities. Now imagine I need $50 000 emergency fund to cover my next conceived worst case scenario. I have 3 choices:
1.keep it in cash account
2.payback my mortgage and have the same available HELOC
3.invest it in real estate or a business and get an equivalent HELOC/LoC

The advantage of holding a cash emergency fund is that it will always be available and won’t set you back into debt. Holding a line of credit on the other hand has the disadvantage that the bank may choose to lower your credit limit. After going through the last 4 years of economic instability, the bank never reduced my LoC so I am confident in holding a LoC in the future.

Chances are I won’t need to use up most of my emergency fund in the next 10 years. That is a lot of money to hold in a cash account which would barely accumulate any interest. I go with options 2 and 3.

My current priority is to repay our mortgage over investing in more real estate or businesses so my emergency fund will be parked in my mortgage.

To give Gail some credit, we do keep a small amount of cash to pay for small emergencies. For the remainder of our emergency fund, it is a line of credit.

Debt, Investment, Leverage, Savings, Strategy

About the author

Clara Cannes, the chief author from Goldeneer is a Canadian that works as a full time employee in the engineering field. Her passion is real estate, entrepreneurship and sustainability. Clara has finally reached financial independence in her late 20's and is on the path to a comfortable retirement by 35.
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