Tracking Crazy Financial Shenanigans

[igthebold]

OK, maybe not shenanigans, but here's what I was thinking about last night:

I save up to pay cash for my kids' private school tuitions every year (no, this is not a discussion about whether I should be doing that ;). I also have a HELOC I'd like to pay down so I can save it for emergencies and, well, have it paid down. It's at 4.75%, and currently costing $50+/month in interest.

So, if I "store" the tuition in the HELOC, I save real cash every month. All well and good.

However, how in the world do I keep track of that? I have two inclinations: accept the challenge of tracking it in a spreadsheet somehow, or just trust that I've got the money available and pull it out of the HELOC if appropriate when I need it.

Any thoughts? I hate complexity, but I also hate shelling out interest payments, and I hate not feeling like I have control over my money.

I'm probably overthinking this, aren't I? Someone tell me I am. :)

[arebelspy]

However, how in the world do I keep track of that? I have two inclinations: accept the challenge of tracking it in a spreadsheet somehow, or just trust that I've got the money available and pull it out of the HELOC if appropriate when I need it.
...
I'm probably overthinking this, aren't I? Someone tell me I am. :)

Yeah, I feel like you're overthinking it.  I'm not sure why you'd have to "trust" you have the money available.  If you pay down that HELOC with payments that would be going into savings for tuition, then write a check from the HELOC account for the tuition, you'll e earning the difference in interest between what your HELOC costs and what you'd be earning on the cash otherwise.

What exactly do you want to track?  How much exactly you'll be saving?  Is approximating that not good enough?

Can't you check your HELOC balance online?

[igthebold]

What exactly do you want to track?  How much exactly you'll be saving?  Is approximating that not good enough?

I feel like I want to be able to assign dollar amounts to the money I have saved up for things. So, if my long-term savings is $4K “in” the HELOC, and $2K in a savings account, I want to be able to reliably come up with the number $6K.

However, I’m beginning to conclude that my main goal should just be to keep things as simple as possible while still saving money. Understand the flow of money at a high level and don't be crazy detailed. Anything robust would likely be unsustainable.

[arebelspy]

What exactly do you want to track?  How much exactly you'll be saving?  Is approximating that not good enough?

I feel like I want to be able to assign dollar amounts to the money I have saved up for things. So, if my long-term savings is $4K “in” the HELOC, and $2K in a savings account, I want to be able to reliably come up with the number $6K.

However, I’m beginning to conclude that my main goal should just be to keep things as simple as possible while still saving money. Understand the flow of money at a high level and don't be crazy detailed. Anything robust would likely be unsustainable.

Throw as much as you can in the HELOC.  Try to spend as little as possible.  Any amount in the HELOC is "saved up" money, until you get it fully paid off (and paid off such that you use it to pay for tuition, then pay off that amount), so that at that point you can start saving the money in places that will actually EARN you interest instead of saving you a little from PAYING interest.

[Bank]

Throw as much as you can in the HELOC.  Try to spend as little as possible.  Any amount in the HELOC is "saved up" money, until you get it fully paid off (and paid off such that you use it to pay for tuition, then pay off that amount), so that at that point you can start saving the money in places that will actually EARN you interest instead of saving you a little from PAYING interest.

+1 on this.  As has been noted a few other times in these forums, debt reduction and savings have an identical impact on your net worth.  And avoiding 4.75% interest is likely going to be the best return you can get on your savings (assuming you're not looking to plow your money into long-term risky assets).

[SpendyMcSpend]

Is it possible that the bank will close your HELOC without notice?

[igthebold]

Is it possible that the bank will close your HELOC without notice?

That's a risk I've considered. It does have a date attached to it, but that's far future.

Google just told me that if home values drop it might get triggered: http://www.consumerfinancereport.com/home-equity-loans/find-out-how-home-equity-lines-of-credit-are-being-closed-with-no-warning.htm

Not sure how they appraise it, but the trigger appears to be the 80% LTV mark.. if V falls enough, the pull the rug out from under you. Unless you owe money on it.

[menorman]

Throw as much as you can in the HELOC.  Try to spend as little as possible.  Any amount in the HELOC is "saved up" money, until you get it fully paid off (and paid off such that you use it to pay for tuition, then pay off that amount), so that at that point you can start saving the money in places that will actually EARN you interest instead of saving you a little from PAYING interest.

+1 on this.  As has been noted a few other times in these forums, debt reduction and savings have an identical impact on your net worth.  And avoiding 4.75% interest is likely going to be the best return you can get on your savings (assuming you're not looking to plow your money into long-term risky assets).

Also, if the HELOC is large enough (which I imagine it is), it should be possible to pay for the entire year's tuition at once. I of course know nothing about the details of the school your kid(s) go(es) to. But if it's anything like the school I went to, there's a pretty nice discount for paying all at once. Ideally, you would save up that amount, but it may still be a bigger savings than the HELOC interest rate is so make sure you include that in your calculations if it applies.

[smedleyb]

Is it possible that the bank will close your HELOC without notice?

This was my thought too.  Banks always seem to be conveniently unavailable when you need them the most.

[sol]

This was my thought too.  Banks always seem to be conveniently unavailable when you need them the most.

It's not just the bank pulling it that I'd worry about, but depreciation on your property eating into your savings.  The down side of storing all of your ready cash in your home equity is that home equity can evaporate in a hurry.

I know MMM condones it, and I can still see the benefit for some people if their available equity is WAY more than they feel they need to keep in their emergency fund, but that doesn't negate the risk of losing that money, just the risk that losing that money will wipe you out.

In some ways, using a HELOC for your efund feels just like paying down your mortgage instead of investing in the market.  In both cases, you've locked in a rate by tying up capital that you can't get back out in the event of a downturn.

[gooki]

But what's the worst case scenario if the pulled the HELOC.

You'd have to put your children in another school, but at least you got a 4.75% return on your money.

[smedleyb]

That's a risk I've considered. It does have a date attached to it, but that's far future.

Google just told me that if home values drop it might get triggered: http://www.consumerfinancereport.com/home-equity-loans/find-out-how-home-equity-lines-of-credit-are-being-closed-with-no-warning.htm

Not sure how they appraise it, but the trigger appears to be the 80% LTV mark.. if V falls enough, the pull the rug out from under you. Unless you owe money on it.

Don't forget, that article was written during the financial panic.  Banks were shutting down lines of credit left and right to protect their asses.  That was more a systemic banking issue and is less likely to happen anytime soon.

That said, I live in a small town.  If I lose my job, and then turn around to access 20K from a HELOC, my local bank might get wind that I'm desperate and refuse to lend me the money.   Or like Sol said, the value of the home may take another hit and there's no equity to tap, period.  Tying up all your assets in one place -- like a home -- never made sense to me.   More importantly, HELOCS are not the same as cash in the bank, at least not for me.   

I think Arabelspy is spot on when he says pay off as much of the HELOC as you can through spending cuts.  Keep the tuition money separate for now, but resort to some major badassity to pound your debt away.  Shuffling money around is not the solution. 

Good luck!

[grantmeaname]

That article also just explains the theory behind HELOC closure. There are no statistics in the article suggesting that it's even prevalent. If you're concerned, maybe it would be best to go talk to your bank or credit union about the probability of such an event occurring.