You are being a good man; you decided that you will take care of your personal finance. The very first thing you realize is that you require help to manage your investments, debts, insurance, budget and so on. Then, you decide that having a personal planner or a financial advisor would be a great help to create wealth. I can guarantee that they will talk to you about creating an emergency fund.
What is an emergency fund anyway?
Here’s a definition of an emergency fund: it is a highly liquid part of your assets invested in non-risky investments in case you need money to cover for a job loss or unexpected expenses. This money should remain dormant unless a financial catastrophe strikes your wallet.
This money is a waste of potential return
Obviously, if you invest in a low risk financial product, you are wasting your potential return. As an emergency fund requires to be available on the spot, most funds are deposited into a money market account or a savings account. In both case, you can rarely expect more than 4,5%. Therefore, this money could have been used to pay off debts that may bear a superior interest rate or you would have simply invested this money into something that is more profitable. Since higher return is often meaning higher risk, it defeats the purpose of an emergency fund. The goal when you invest your money into an emergency fund is primary to protect your capital. On the other side, if you are 30, you could loose a good 30 years of good returns.
There are alternatives
My favourite alternative is the line of credit. In fact, this financial product doesn’t cost a penny if you don’t use it. You can withdraw money from your line of credit at any time, so it is very liquid and the available limit is stable. Having a 20K flex line would be the best alternative to having an emergency fund. In fact, it is more convenient as you don’t have to put money aside to build a reasonable fund. The money is available 24/7 upon the opening of the account.
Another solution is to build equity in your property. Banks will more likely lend money if they have collateral. Therefore, if you can give your property as collateral and refinance your mortgage, you will be able to access enough money to survive for three to six months.
What is the difference between borrowing or having liquidity
This is where it gets interesting. Normally, an emergency fund is used to cover for regular expenses for a period of three to six months. Let’s say than an individual’s monthly expenses are 5K and that he would be able to borrow this money at 10%. If he takes off the full amount (30K for six months) on the very first day, he will have to pay $250 per month in interest until he can pay back the full amount. This would be the real cost of borrowing money instead of keeping 30K into a savings account. However, you have to figure out how much time it will take to actually gather this sum of money and how much could you earn from it if you would have invested in the market.
I think it is a small risk to take when you think about how much you could earn on the market over time. If you invest money already, you probably have a part of it invested in low risk investment. Why don’t you use this money if anything bad happen? Worst comes to worst, you will still have your line of credit to cover for the unexpected.
The investors are much interested to buy to let mortgages for the enhancement of the maximum range of the profitability. The credit card companies are introducing the different kinds of cards for the customers with different interest charges. The social welfare organizers are very much interested to run debt help programs for the welfare of the debtors. The organizers are trying to find out better debt solution in order to escape the worst conditions of bankruptcy of the victimizers. The home mortgage loan is issued on the guaranteed security of the real property of home of the borrowers. The insurance agents of different companies offer the insurance quotes and leads for the potential customers. You may get start your own work at home by availing the different golden opportunities of internet marketers.
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