Author Topic: Canada: opening a credit line instead of a cash emergency fund?  (Read 3252 times)

moustacheverte

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I've got an emergency fund sitting around in cash (about 6k) but I feel like it's a bit wasted at 1.30% interest.

Would it be a better idea to open a credit margin for 6-10k with a bank and use this should I ever need emergency money? I would then sell however much investment I need to pay back the credit line.

Or should I invest the 6k and sell however much I need should an emergency arise? I'm invested in TD e-series so it would maybe take a week or 10 days turn around to get some cash out.

What's the mustachian thing to do?

TheAnonOne

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #1 on: March 31, 2015, 11:10:55 PM »
I don't think it matters too much ultimately. Most people on this board will be talking 6 or 7 figure accounts and 6k just seems like a rounding error. If you are just starting off it might seem like a big deal but I wouldn't sweat it. I personally keep around 10k in my checking.

If you want to optimize it perfectly, sure, invest it all and spend everything on a rewards credit card. Pay off the card with income and put the rest into taxable accounts. (Something you can get money out if you need it.)

RichMoose

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #2 on: March 31, 2015, 11:18:07 PM »
I don't think there is a perfect answer to this because both options are acceptable for the masses. It depends more on your personal situation: job stability, portfolio size, income/expense ratio, 2 income or not, etc. Cash funds are clearly less risky, but not always the best option.

I myself keep a couple g around, but not enough to call it an emergency fund. For true emergencies I have a HELOC.

Retire-Canada

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #3 on: April 01, 2015, 07:31:21 AM »
I've got an emergency fund sitting around in cash (about 6k) but I feel like it's a bit wasted at 1.30% interest.

Would it be a better idea to open a credit margin for 6-10k with a bank and use this should I ever need emergency money? I would then sell however much investment I need to pay back the credit line.

Or should I invest the 6k and sell however much I need should an emergency arise? I'm invested in TD e-series so it would maybe take a week or 10 days turn around to get some cash out.

What's the mustachian thing to do?

I do both of those things above.

My EF fund is my investment portfolio and a line of credit. I'll use whichever makes the most sense when I factor interest costs, investment valuation and tax impacts of cashing investments in.

If I am just needing a month of cash flow until I can pay off the expense I'll use my LOC as the rate for 1 month is low.

The key to being successful is flexibility and a solid tool box of options to deal with what life throws at you.

-- Vik

nereo

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #4 on: April 01, 2015, 07:45:34 AM »
I've got an emergency fund sitting around in cash (about 6k) but I feel like it's a bit wasted at 1.30% interest.

Would it be a better idea to open a credit margin for 6-10k with a bank and use this should I ever need emergency money? I would then sell however much investment I need to pay back the credit line.

Or should I invest the 6k and sell however much I need should an emergency arise? I'm invested in TD e-series so it would maybe take a week or 10 days turn around to get some cash out.

What's the mustachian thing to do?
I agree that holding $6k in an emergency fund at 1.3% interest is a waste... you're almost certainly loosing value to inflation.  I also respectfully disagree with TheAnonOne that it's not an amount worth worrying about - any amount of money that's not productive is a waste, and $6k could earn $420/year after inflation ($5.8k over a decade).  Not really chump-change.

a line of credit margin would be a good strategy if it can be left open until used and doesn't have an annual fee.
credit cards also allow you 30+ days to pay off an emergency expense interest free.  Plenty of time to sell off some of your TD e-series if necessary.
There's also the option of temporarily stopping automatic retirement contributions to pay off a large unexpected expense.  This is what we are doing now.

my opinion: use available credit to your advantage.  "Savings funds" are a drag for people with positive net worth


Bob W

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #5 on: April 01, 2015, 08:03:49 AM »
6K is a huge amount of money.   To put that in perspective, if invested at the standard accepted rate or return often quoted here,  6K turns into 6 Million dollars in 60 years.    I'll be dead, but my grandkids might be thankful if the world hasn't gone to hell by then. 

In a shorter time frame, say 30 years,  6K might come closer to 200K and generate 6K a year by itself.  (I'm in my mid 50s and can tell you that 30 years happens pretty damn fast!)

So you can --

a.  invest it in businesses (stocks) and real estate  -- and have credit cards or a HELOC to cover
b.  use the checking account churning method mentioned on the forum recently that has an effective rate of return of 20% (I realize you're in Canada so this may be more difficult, but other readers may benefit)

IMHO b. is the obvious choice.   Why would anyone pass on 20% return with so little effort.   That equates to $1,200 per year on your 6K.     Think about that $1,200 vs.  under $60.   Which would you rather have? 

nereo

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #6 on: April 01, 2015, 08:31:19 AM »

b.  use the checking account churning method mentioned on the forum recently that has an effective rate of return of 20% (I realize you're in Canada so this may be more difficult, but other readers may benefit)
Hey Bob W.  Must have missed the threads on checking-account churning... got a link?  thanks.
N

Bob W

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #7 on: April 01, 2015, 01:01:50 PM »

b.  use the checking account churning method mentioned on the forum recently that has an effective rate of return of 20% (I realize you're in Canada so this may be more difficult, but other readers may benefit)
Hey Bob W.  Must have missed the threads on checking-account churning... got a link?  thanks.
N

You bet my friend!   I'm surprised this post died so quickly.   We need to have a section to keep the great real money making posts active.   Sure its fun to read about why people hate the mall or who is splitting with their cheating spouse but show me the freakin money!   

A married couple could net 3K per year add that to the 20K in mileage hacks I learned about through this forum and it pretty much makes it worth the price of admission. 

http://forum.mrmoneymustache.com/share-your-badassity/bank-account-churning-how-to-make-$1600-in-a-year-by-being-organized/msg609830/#msg609830

moustacheverte

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Re: Canada: opening a credit line instead of a cash emergency fund?
« Reply #8 on: April 01, 2015, 02:37:46 PM »

b.  use the checking account churning method mentioned on the forum recently that has an effective rate of return of 20% (I realize you're in Canada so this may be more difficult, but other readers may benefit)
Hey Bob W.  Must have missed the threads on checking-account churning... got a link?  thanks.
N

You bet my friend!   I'm surprised this post died so quickly.   We need to have a section to keep the great real money making posts active.   Sure its fun to read about why people hate the mall or who is splitting with their cheating spouse but show me the freakin money!   

A married couple could net 3K per year add that to the 20K in mileage hacks I learned about through this forum and it pretty much makes it worth the price of admission. 

http://forum.mrmoneymustache.com/share-your-badassity/bank-account-churning-how-to-make-$1600-in-a-year-by-being-organized/msg609830/#msg609830

Yeah... We don't have it as good up north. In 2015, I churned both CIBC and RBC accounts. I got 700$ and it cost me about 100$ in fees. But AFAIK that's the only 2 offers going on in Canadian banks.