Monday, December 7, 2009

Emergency Funds

I was planning on posting about something entirely different today, but something came up that I thought I should write about today. I already had the other article written along with several others, but they can wait. Assuming anyone is reading this I don't want to overwhelm you by posting them all. :)

I took the car in for servicing today and I got the bad news that our transmission is shot. He seemed to expect me to just buy a new car. Having talked it over with my wife, we took the advice from the adage "the cheapest car to own is the one you have". I plan to talk about that one day and how we plan to buy a new car with cash up front. But, for now, I thought I'd look at how we're going to pay for these $1500 repairs.

So of course we had to draw from the 3 months of savings from our emergency fund right? I wish! Who has that kind of money sitting around anyhow? The truth is if, I did I'd have better uses for it anyhow. After all why would I want to earn 1% in a savings account when I'm paying over 5% on my mortgage and 3.25% on my line of credit.

Don't get me wrong, I think an emergency fund is a good idea. I just don't think 3-6 months salary is feasible or even smart. Once the other debt is taken care of think it makes sense to save enough for some unexpected repairs. The amount would depend on your comfort level, but I'm thinking a few thousand should suffice for my needs.

I wish I can say that's where I'm taking these funds from this time, but no such luck. I haven't built it up at all. What am I going to do now? What would I do if I needed more than I had, or was laid off for an extended period of time? My answer, is the Home Equity Line of Credit (HELOC).

If you think of it as an insurance plan it works a lot better than any others that I'm aware of. You don't have to pay a monthly premium until you actually borrow the money (also known as interest). The minimum is usually only the interest payment.

You will of course need to pay it off and you can't (and shouldn't) abuse it for non-emergency use. However, it can help you to get through a pinch. Like the one I'm experiencing today.

Just thought I'd share in case you were thinking that saving 3-6 months salary would be next to impossible too. This might be a better alternative.

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