HELOC as "emergency fund" is MMM-approved:
http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/And I would agree that in general, once you are at the point where you are saving a stache (such as in taxable accounts or Roth IRA contribution amounts), this is a reasonable thing to do. Your whole stache is an emergency fund. Vik is exactly right about the opportunity cost.
I just remembered I saved a few MMM comment snippets on this subject! Pasted here for your amusement:
-----
Yeah, I’ve always questioned the idea of an emergency fund. It’s a great tool for the financial beginner who lives from paycheck to paycheck, and for whom a broken water heater would make the difference between making ends meet and borrowing via a credit card. But once you get off the ground, your credit card is a monthly buffer and your investment accounts are the emergency fund.
------
Reader question: My dilemma is our so-called “emergency fund”. We keep basically 6 months of expenses here, plus we have another $5k (almost) saved in our HSA to pay a medical deductible should disaster strike. Part of me doesn’t like that $25k sitting around earning 1%. I’m tempted to throw part of the $20k into a short-term bond fund and try for a little more return. The other part says “shut up” and don’t worry about return, worry about safety and liquidity. We are debt free, except our mortgage at 4.825%. My job is about as stable as it gets. I am next in line to succeed the current owners, unless the business unexpectedly fails.
MMM June 8, 2011, 10:20 pm
I think your emergency fund is costing you quite a bit of money. Since emergencies bigger than what you could handle with just a credit card, paid back in full with your monthly income, are probably incredibly rare, I would feel very safe having it in a bond fund. In the worst case, you would have to cash it in and it may be worth a teeny bit less than you bought it for. This is much better than your current situation, where you are GUARANTEED to earn several percent less per year on the emergency fund, forever – costing you $600 per year or more in foregone investment gains. Emergency funds are great for people just starting out and living on the very edge. But when your emergency fund is the size of a 2007 Mercedes, things are getting crazy.
---- another MMM comment ----------------
I’ll have to step in here and add an alternate perspective on this Emergency Fund business. I think the Dave Ramsey idea of an emergency fund is silly. Any source of money – stocks, bonds, cash, a car you can sell, a credit card, or a line of credit on your house – will do just fine as an emergency fund.
It is a waste to leave ANY money sitting around in cash not working for you, and I have never done so. Occasionally I have had “emergencies”. Small ones, less than a month’s take-home income, just go on the credit card and get paid off automatically when the credit card becomes due. If there are medium-sized ones, I can easily draw from a $75k line of credit on my house, which costs me nothing to own when the balance is zero. For enormous ones, like the time I had to pay off a $406,000 mortgage on a rental house to avoid a complex legal problem, I just sell some shares. It only takes 1-3 days to get the money.
As for cash – I just checked and I have $17 in my wallet right now. The regular bank account is down to $800 for the rest of the month since I just cleaned it out to buy some the discounted shares available these days in the stock market.
I feel the idea of an emergency fund is valid for people just starting out on a recovery plan from financial ruin – living paycheck to paycheck, such that even a broken refrigerator would normally cause an unpayable credit card bill. But once you have some assets, and especially with low living expenses, your worries are gone forever.
-------------------------
What the fuck!?! I can’t believe people still don’t get this basic concept!!! The reason you should gladly pay 3-4% on your HELOC during emergencies is this: By maintaining an emergency fund, you are paying 5-6% ALL THE TIME (in the form of foregone investment returns) when there are no emergencies.
Emergencies are rare. Most of the time you are running in non-emergency mode. Living a Mustachian lifestyle further lowers the probability of emergencies.
Dave Ramsey’s advice is very effective for simpler people – those who tend to get themselves into debt over and over again. This is the advanced personal finance blog – where the adults who understand statistics and math hang out.
Dave Ramsey is rich because he’s a good entrepreneur and sells a lot of products to people. Mr. Money Mustache is rich (at a much younger age) because he does his math correctly.
-------------------------
Good point – With no high-interest debt, an emergency fund is a much less bad idea. And for those without the flexibility of a home equity line of credit and other assets they could potentially sell and lifestyle changes they could potentially make, having some form of semi-liquid cash becomes increasingly practical. Don’t neglect the power of unemployment insurance, though. Many people today lost their jobs with no e-fund, and have been living off of UI for over a year. That’s why the program exists.
I’ll still never have a cash emergency fund myself, however. Just because stocks are also liquid – you can sell them in one day. “What if they happen to be down when I need to sell?” is the wrong question to ask. Instead, ask, “what direction do stocks go on average? And thus where are they more likely to be if I ever have to sell them in some unpredictable future year?”.
You can’t predict the future, so you bet where the odds are in your favor instead. It doesn’t matter if you lose sometimes.. it matters that over a lifetime you will tend to win more often.
-------------------------
