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HelpJust about any financial planner would recommend that a person keep some money stashed for emergency expenses. Otherwise, how else would you pay for a large, unexpected expense such as a leaky roof, a totaled car, job loss, etc.? If you have money set aside, you don’t have to be stressed out at the time of need.
No question this makes a lot of sense, but doing so has a hidden cost. Having to keep your emergency money in a low risk bank account prohibits you from investing elsewhere and potentially earning a higher return. If you had invested your money in the stock market over the past few years, you would be in trouble if you had to tap that account today.
If you are financially savvy and want to have all of your money working for you, you might want to consider a home equity line of credit as your emergency savings vehicle. A home equity line of credit works much like a credit card. You only pay interest when you have an outstanding balance, otherwise you have a line of credit that’s been issued to you that you can use when needed. The major difference between an equity line and a credit card is that the former is secured by your home. Since the line of credit is secured with collateral you will generally receive a much more favorable interest rate than you would with a credit card. But if you fail to make your loan payments, the bank can foreclose on your home as recourse.
So is a home equity line of credit a viable option for your emergency savings? Like anything, the answer depends on your financial situation. Take a step back and ask yourself whether you have the ability to make an extra loan payment should the need arise. Just think about if you were to lose your job or be unable to work due to a medical condition, how would you make that extra payment? Also ask yourself whether you are responsible enough to actually invest the money elsewhere you would’ve put towards your emergency fund.
For responsible individuals, an equity line of credit can be a solid alternative to saving emergency funds in a traditional low yielding bank account. But you’ll want to shop around various home equity lenders first to make sure you can find a low home equity loan interest rate.
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