I'd rather have hard cash. The last thing I want to worry about is my LOC even if it is secured. I also won't have to worry about servicing the loan which if the rates are high could get quite expensive.
If you can be certain that your LOC will be there, it's probably a good plan, but the problem is that you can't be certain. The times when you need an emergency fund the most are the exact times when your ability to obtain credit is most in jeopardy and your LOC is most likely to be unavailable. You can use access to credit or saleable assets as a reason to reduce the size of your emergency fund, but to eliminate emergency savings altogether is a risky proposition.I'm siding with #2 as long as you are assured that your line-of-credit won't get cut back in the event of a major emergency. I think of #1 as a guaranteed loss of growth to protect yourself against what is supposed to be an unlikely event.
I was of the opinion that #2 was better because of the reasons you point out... In fact, that's what we did when our mortgage was much larger than it is now. But, the problem with this approach was revealed in the current credit crisis. If things get really bad and we do need to tap into the credit line, it may not be there and it may be difficult to get another one. If I were starting over now, I'd go with #1.1) Keep an emergency fund
2) Pay whatever excess funds you have into your mortgage//RRSP and have a line of credit for any emergencies
I think it's a personal decision. It's probably more efficient to take excess funds to pay down debt, but to some, it just "feels" better to have cash on hand. We're a prime example of the latter, we have a mortgage of over $75k, but we hold about $40k in cash.If you had a mortgage (or other debt, or just good secure investment opportunities, like one's RRSP), which would you do:
(This isn't a poll because I'd rather hear your reasons than tally opinions)
1) Keep an emergency fund
2) Pay whatever excess funds you have into your mortgage//RRSP and have a line of credit for any emergencies
I'm siding with #2 as long as you are assured that your line-of-credit won't get cut back in the event of a major emergency. I think of #1 as a guaranteed loss of growth to protect yourself against what is supposed to be an unlikely event.
If you choose to do #2, you're spending your emergency fund frivolously, you're just optimally allocating it. If a real emergency hit, you could withdraw on it (maybe not instantly, but if you racked up debt against your secured line of credit, you could just repay it when you renegotiate your mortgage, right?)
Any comments?
We don't have a mortgage on our personal residence, but we have an emergency fund and a LOC as well.If you had a mortgage (or other debt, or just good secure investment opportunities, like one's RRSP), which would you do:
(This isn't a poll because I'd rather hear your reasons than tally opinions)
1) Keep an emergency fund
2) Pay whatever excess funds you have into your mortgage//RRSP and have a line of credit for any emergencies
I'll agree that the risk is very low. But it is there. My secured LOC has this statement in bold letters, no less:Should one be worried so much about their line of credit getting cut back to such a significant degree, especially if they've built significant equity within their residence that the LoC is secured against?
This situation is a good "test", isn't it, of all the theory? I have a far clearer sense of my comfort levels with risk, cash on hand etc than I have ever had.but this credit crisis has illustrated the importance of an emergency fund
+1As CC said in the past I would have also voted for option nr.2 but this credit crisis has illustrated the importance of an emergency fund.
Emergency is the wrong time to get into debt.
Emergency fund is your life line, when life gets though. If you have build a sufficient seize emergency fund and have insured yourself properly you will be able to handle any type of emergency. Without the EF i think you are leaving yourself very vulnerable.
Shouldn't you need more (not less) if both spouses are working? By having two people in the workplace, you are doubling the probability of an emergency (This is American statistics before the current recession, but the probability of a layoff in any given year for a single-income family is 1/32; but the probability is obviously doubled [= 1/16] for a double-income family.)The size of the emergency fund will also be dictated by your personal circumstances. If both spouses work, the risk may be lower and a smaller fund may be appropriate.
Shouldn't you need more (not less) if both spouses are working? By having two people in the workplace, you are doubling the probability of an emergency (This is American statistics before the current recession, but the probability of a layoff in any given year for a single-income family is 1/32; but the probability is obviously doubled [= 1/16] for a double-income family.)
The statistical likelihood of both losing their jobs is multiplied, not added. If the probability of a coin toss showing heads is 50%, then the probability of tossing two heads in a row is not 100%, but rather one in 4 or 25%. In your instance the chance of both losing their independent jobs is 1/32 * 1/32 = or about 1/1024.
If they both work for GM or Chrysler, on the other hand......
DAvid