Emergency Fund VS Line of Credit

Countless personal finance" gurus" try to drive home the fact that everyone needs an “emergency fund” to cover any unseen costs that might arise in the future.  The amount of money that they recommend to have stashed away, however, seems to be different.  It can vary greatly…. 1 month, 3 months, 6 months and even 9 months of earnings is not out of the question.

For many people, I do agree, that having a ‘rain-day’ fund is a good idea, but in my opinion, this is unnecessary if you can obtain a line of credit.

Let me explain….

A lot has been said in the media recently about the personal debt of Canadians and the “danger” we are in if interest rates move too quickly.  This may be true for certain people who adopt a “buy now, pay later” philosophy for all consumer goods and use a line of credit as their piggy bank….but my philosophy is that you should gain ‘access’ to all available credit BEFORE you need it because chances are you can’t predict the future….but if you can, please contact me asap.

There may be unexpected home repair (especially if you own a few investment properties on top of your existing home), you might have a large auto repair bill, medical bills, etc, etc.

Why not have an ‘emergency fund’ for these types of occurrences??

In my opinion, having an emergency fund just sitting in a bank account is not the best use of money.  Each day, this money will lose value due to inflation and I would much rather have that same amount of money invested in a liquid asset MAKING money.  In addition, having 3 months of earnings stashed away for example may not be enough to cover a large repair bill…and then where do you get the extra cash that you need?

For these reasons, my emergency fund is a line of credit.

Here is a quick comparison:

$5000 in a “high interest” (laugh) savings account at 1.5% will be worth $4925 in 1 year adjusted for 3% inflation.  $5000 invested in Skyline REIT (currently yielding 9% on their commercial properties) will be worth $5300 in 1 year adjusted for 3% inflation.  This is a swing of $375.

If you need money fast and you have access to a line of credit, you can use the line of credit for the short term fix and either pay off the balance according to the payment terms or use the $5300 from your investment account to pay off the balance….(assuming you didn’t need more than this during your ‘emergency’)

Adding to this flexibility is the fact that a home equity line of credit (HELOC) can offer even more flexible payment terms.

More on lines of credit in my next post!