HELOC as emergency fund

[Steve]

In looking at buying a property, we applied for a HELOC (home equity line of credit) to make cash flow issues easier. We decided not to buy the second property, but in talking with my banker, we decided to go ahead and set up the HELOC. There are no closing costs, and there are no interest charges as long as we don't draw any money from it. It will remain available for 10 years. If we need money 5 years from now, we don't have to prove my income, we can just ask for a check.
I figure we can now use this HELOC as an emergency fund. We always keep more cash than I would like, as it makes my wife feel more comfortable. I'm hoping that having this money available will make her feel better about keeping less in cash.
Does anyone see a downside to using a HELOC in this manner?

[The White Coat Investor]

What's the point of your emergency fund if not to stay out of debt? That's the point of mine.

The other issue with a HELOC e-fund is that HELOCs tend to go away at the same time other events that require the use of an emergency fund seem to happen. So I think it's less than ideal, so much so that I wouldn't even call it an emergency fund even if it plays some sort of back-up role in your financial plan. I'd just admit you're flying without an emergency fund and plan to borrow in the event of financial need.

But in your case, there was no cost to setup and no interest, so little harm as long as you can resist the temptation to raid it to buy a wakeboat.

[StarTrekDoc]

I would agree with WCI if you're just getting started and have significant debt and living on the edge of a paycheck, a HELOC without a real financial backup in taxable accounts probably isn't the best planning.

That said, We have HELOC for our EF  because we're FI.

A HELOC as EF should really be for those with minimal debt or have a cushion already and sit around wondering what their EF should be---hence having enough buffer to tap a capital source without liquidating their taxable accounts and creating a capital gains event taking the double whammy for a quick EF event.

HELOC is perfect for that.  Quick access, cheap and able to scale back/payback with little effect and costs.

Even with Harvey, no reports that I could find of HELOCs being shut down -- and that's with the actual secured asset being affected directly.

 

 

[ifonlyFI]

I keep a HELOC open for post tax investments. Im going to guess many on this forum will disagree with my use. Instead of keeping a checking account with spare 50k or 100k, I have an open heloc. If an interesting investment/real estate comes about, I use the heloc to invest and then payoff heloc off in a few months.

[q-school]

people keep telling me about this idea of using heloc as an emergency fund.

is there something that prevents saving for/keeping money in an actual emergency fund?  are you just hoping to leverage the money from the emergency fund into better returns?   most of us will thankfully never dip into the emergency fund, so I can understand the attractiveness of putting the money to 'better' use.  it sounds like this is not the situation for you, more that you and your wife disagree on the ideal size of the emergency fund.

if you have no mortgage, then I think the size of your emergency fund can shrink.  but mortgage plus heloc?  suggests spending side problems to me when I hear it (not saying it applies to you).   but many physicians have the luxury of cash flowing emergencies, so in a way do we really need the heloc?  I guess personally I would rather take the taxable event if it came to it then heloc, but I realize reasonable minds can differ on this point.  but since I keep enough money in emergency fund and also can cash flow, unlikely I would be forced into that situation.

sometimes I think that people are trying to achieve maximum efficiency with every dollar they have.  in my experience, that causes a lot of stress 

if it were me, I would rather convince my wife that I was right about emergency fund.  however, things being what they were, at the end of the conversation, the emergency fund would probably be unchanged and my wife would be happy knowing she let me think I was right.

good luck.

[jfoxcpacfp]

Echo wrote:

I figure we can now use this HELOC as an emergency fund. We always keep more cash than I would like, as it makes my wife feel more comfortable. I’m hoping that having this money available will make her feel better about keeping less in cash. Does anyone see a downside to using a HELOC in this manner?

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I guess the missing piece is how much do you keep in cash? If $20k - $30k, that sounds reasonable enough. Add another zero and it doesn't. In that case, I'd sub out the HELOC and dial down the cash. If you are able to keep a massive amount of cash lying around, that suggests to me that, if you had to tap the HELOC, you'd be able to pay it off quickly. If this is the situation, I agree with you on the HELOC.

[The White Coat Investor]

jfoxcpacfp wrote:

Echo wrote:

I figure we can now use this HELOC as an emergency fund. We always keep more cash than I would like, as it makes my wife feel more comfortable. I’m hoping that having this money available will make her feel better about keeping less in cash. Does anyone see a downside to using a HELOC in this manner? 

Click to expand…

I guess the missing piece is how much do you keep in cash? If $20k – $30k, that sounds reasonable enough. Add another zero and it doesn’t. In that case, I’d sub out the HELOC and dial down the cash. If you are able to keep a massive amount of cash lying around, that suggests to me that, if you had to tap the HELOC, you’d be able to pay it off quickly. If this is the situation, I agree with you on the HELOC.

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My e-fund is actually a very small percentage of the money I keep in cash. The majority is actually taxes due on money earned but not yet paid. I guess I just don't feel comfortable investing money I know I will have to pay to the IRS in a couple of months, even if the likely thing is that I'll earn enough between now and then to pay the tax bill from new earnings.

[jfoxcpacfp]

Crixus wrote:

Echo wrote:

In looking at buying a property, we applied for a HELOC (home equity line of credit) to make cash flow issues easier. We decided not to buy the second property, but in talking with my banker, we decided to go ahead and set up the HELOC. There are no closing costs, and there are no interest charges as long as we don’t draw any money from it. It will remain available for 10 years. If we need money 5 years from now, we don’t have to prove my income, we can just ask for a check.
I figure we can now use this HELOC as an emergency fund. We always keep more cash than I would like, as it makes my wife feel more comfortable. I’m hoping that having this money available will make her feel better about keeping less in cash.
Does anyone see a downside to using a HELOC in this manner?

Click to expand…

Oh God, we are so at a top.

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And that, boys and girls, is a perfect example of anecdotal-evidence based stock market predictions. Care to tell us when the next bear will happen, @Crixus? Have you moved to cash and gold yet?

[jz]

If the market dropped 35-40%, I'd open a heloc to use for market investments.

[Donnie]

I agree with WCI and Crixus on this one. Using a HELOC for an e-fund is a bad idea for the reasons they both mentioned. If things go bad in tandem as happened in 2009, you may find yourself without a job, tumbling home values, and low cash. Your only alternative may be a high cost loan. If such a scenario doesn't make you feel uneasy, then you could pursue a debt-as-an-emergency fund strategy. I am too risk averse.

Using leverage to enhance returns in a bear market is also a bad idea in my view, but it seems many in this board believe expected returns are higher after a market downturn.

WCI, holding cash or equivalents to pay future bills isn't a bad idea. Those future payments would show up as liabilities or basically interest free debt on your WCI balance sheet. Given you paid off your mortgage, you have developed more debt aversion as you have reached financial goals, so there is no reason to leverage the float here to enhance your returns. I doubt earmarking current cash and investing future earnings is that much worse than investing current cash and earmarking future earnings.

[StarTrekDoc]

@q-school - no need for a large cash account beyond what it takes to payoff the monthly bills and a cushion for smallish immediate needs.  Like Johanna said, $20K is about all we have in our cash account and rest is funneled into investments.

For those fast investment opportunities on stocks for our speculation account-- we have the margin account for that specific purpose for that quick buy and then funnel in from the HELOC for cheap leverage as we paycheck the HELOC in short order.

My MO is to have every dollar in its designated pot work at its most optimal level and to set and forget.  To access a retirement fund (even in taxable) is an ultimate no-no.  Beyond rebalancing, 529s, IRAs and Taxable retirements are set and forget mode.

Having $100k sitting around is a high opportunity cost ($5k+ yearly) when people here split fund choices with .5% annual differences that would take $1M investment to make up that EF simple interest alone.

 

[StarTrekDoc]

Another reason for our HELOC -- the ability to pull up the stakes on the house an minimize OUR risk on the asset quickly and make sure the bank helps us hold insurance accountable.

If we were in Houston, I would have tapped the HELOC in full for the week.  That would minimize our risk on our single largest asset and if disaster did strike, our bank will be side-by-side WITH us to hammer things out instead of fending for ourselves.   I love AAA, but trust them not in a disaster.

Same concept in a significant downturn in the economy.  It's a fast and easy way to 'head for the hills' in cash mobilization if the housing market completely collapses. -- This also places shared risk with the Bank if real estate goes sideways.

Admittedly HELOC for investment borrowing can be 'risky' in a downturn of economy.  For this forum, how many lost their jobs from a recession?  Or lost significant income stream because of it?   I think the most risky maybe cosmetic surgery and dentists --- how did you all fair in 2005-2010?

 

[Edit to clarify HELOC usage]

[Donnie]

StarTrekDoc, I am confused by your strategy. You are proposing to borrow money against your home if the value declines and then potentially skip town? If so, that is a horrible and unethical strategy. Basically stealing. I suspect your HELOC would have stipulations that would allow the bank to freeze the line in the event of a house market decline. Even if they don't, you have no justification for trying to jam lenders if the equity of your home devalues. Truly a terrible strategy you have outlined and hard to believe anyone would think that's ok.

[Dr. Mom]

Echo wrote:

I figure we can now use this HELOC as an emergency fund. We always keep more cash than I would like, as it makes my wife feel more comfortable. I’m hoping that having this money available will make her feel better about keeping less in cash. Does anyone see a downside to using a HELOC in this manner?

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The biggest downside that I see would be if your wife doesn't feel like she has a voice in the finances because you either override her or wear her down.  Women often look at finances and risk very differently than men.  Listen to her.   We have never regretted having an EF.  We compromised on a number and do not keep rehashing it.  The HELOC is on top of the EF.

Kitces:  Buying Happiness & Life Satisfaction with Greater Cash-On-Hand Reserves

Buy it for her.

 

 

[RogueDadMD]

Crixus wrote:

It’s funny how many on this forum eschew holding a lot of cash, yet they mindlessly plow funds into passive ETFs many of which have AAPL as a number 1 holding. AAPL the most notorious of cash hoarders

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That's a false comparison -- I am guessing you know that and are just trying to push buttons.  Having said that, I don't keep cash as an asset outside of my emergency fund.  My HSA has a small amount in cash but is mostly invested as well.

Also I always imagine you as you are in your profile picture -- I'm curious how far off from reality that is.