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Emergency fund upside down and backwards
Old 09-15-2008, 11:23 PM   #1
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Emergency fund upside down and backwards

I have never maintained an emergency fund, thinking instead that my HELOC could be called upon in case of an emergency. Recently with news that many lenders were freezing HELOCs, I changed this plan and saved up a few months worth of expenses to make a real (but small) emergency fund. Now I wonder if this is enough.

My company is somewhat unstable and recently my boss and several others were "let go" unexpectedly. New management has not yet told us what the new organization will be. The field we are in is in a bit of a slump and many related companies have announced large layoffs, so the market is flooded with job seekers. I don't know that my job is in jeopardy, but if it were, finding a new one could take much longer than usual in a slumping industry.

I have plenty of equity and plenty of assets in tax advantaged accounts, but very little in taxable accounts and only the emergency fund would be easy to access for cash.

So, this makes me think I need more emergency fund. Saving up additional funds is possible, but slow. I wonder if I should actually tap the HELOC proactively while I'm still employed. It will cost me something in interest (though not much as I have a great rate) but it will buy me as much liquid emergency fund as I might want. Drawing funds now while I am employed would allow me to get some liquidity that might be impossible if I lose my job and my HELOC gets frozen, just when I really need it. If not, I just pay it back as quickly as I can and keep the emergency fund. I don't think it will make much difference in planning for FIRE, except maybe to lower potential stress from worrying about involuntary job loss.

So, any one else faced a similar situation? Any thoughts about the idea of borrowing to establish an emergency fund.
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Tap The Line
Old 09-15-2008, 11:39 PM   #2
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Tap The Line

In my opinion you should tap the line for some extra cash. Then stash that with the best yield you can find. If things blow over in a few months you can repay. It will cost something but it sounds like you would sleep better.

Years ago I took out a line of credit from Wells Fargo. It is a no recourse loan, meaning I could walk if I wanted to ruin my credit.

It is a $50,000 line and I use it once in a while. The current rate is 7%. Since that rate includes cash advances at 7% as well, I consider it a bargain.

I would work toward getting one like mine if you can find it over time.

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Old 09-16-2008, 08:07 AM   #3
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Won't the terms of the HELOC tell you under what conditions it could be cut off?
Would you lose it if unemployed? If not why tap it.
Also, don't forget you will probably get a severance package and unemployment insurance.

It might be difficult to sit tight and do nothing but, that might be the best to to right now.

A past general guideline for an unemployment "emergency fund" was 6 months.
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Old 09-16-2008, 08:24 AM   #4
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I did just that - tapped the HELOC for about $80K. Rate is 4.5% (Adjustable) and it may even drop today or tomorrow. I could have just cashed in or taken a 2% loan against CD's but they are paying an average of 5.7% interest and the HELOC (interest only) is tax deductible. Seems like I am renting money at a good rate and getting a better rate on savings.
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Old 09-16-2008, 08:32 AM   #5
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Language in the HELOC is vague about when the bank can freeze the line. I am required to notify them about any material change in status such as unemployment, so I'd guess that could be a trigger for them. Otherwise they seem to be allowed to freeze at their discretion, which I've heard some banks were doing in areas with significant drops in Real Estate prices. That shouldn't apply to me as prices are not too bad here and I have quite high equity, but I've learned that "shouldn't" isn't the same as "doesn't" when a bank is involved. If some kind of blanket policy goes out, I could easily be caught up in it.
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Old 09-16-2008, 08:34 AM   #6
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Maybe sort of a combo approach, put 3 months worth of bare bones expenses in a savings account that is borrowed money, then use your savings to pay that back to the HELOC over the next 3-6 months. That would offer the best of both worlds, ready cash and no debt service if the worst happens.
I have both an emergency fund of 3 months expenses and a $50k HELOC on a paid for house. The bank would probably be delighted if I used the HELOC and defaulted.
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Old 09-16-2008, 09:05 AM   #7
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I used a HELOC for an emergency fund for several years, but in 2007 I heard that some were being cancelled. What good is an emergency fund that isn't there when you actually need it? Consequently my choice was to turn up the heat on saving up an emergency fund pronto.

My HELOC was there in case some emergency came up before I had enough saved up to pay for it. Once the emergency fund was saved, I had no use for the completely unused HELOC so I cancelled it so that I didn't have to pay the (very small) yearly fees. I never did borrow anything from it and I wouldn't suggest that you borrow anything from it, either, barring an emergency.

If they are going to cancel your HELOC due to unemployment, I am thinking they would probably do so whether or not you had borrowed from it previously and probably all borrowed money would be due. Thus the urgency of saving more if possible right now.

A 3-6 month emergency fund normally seems about right for me (more if/when my car is on its last legs).
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Old 09-16-2008, 12:50 PM   #8
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They did the heloc stomp to my neighbor. He wrote me a check to cover his half of some fence work and they returned the check as unpaid with a notation that was basically 'contact the signer'. He called the bank and they told him they paid it. On his second call they said "oh yeah, we froze your heloc".

Nice way of letting the customer know.
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Old 09-16-2008, 01:27 PM   #9
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The most logical course of action to me is to temporarily stop contributions to your pretax accounts until you have a balance in your emergency fund with which you are comfortable. To lose a job and fund it by incurring debt may be a possible way to maximize your funds but you risk no longer being in control of your situation.

Emergency fund to me is the most important of all planning funds for retirement.
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Old 09-16-2008, 01:33 PM   #10
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Originally Posted by growing_older View Post
So, this makes me think I need more emergency fund. Saving up additional funds is possible, but slow.
I know the conventional wisdom is 3-6 months' expenses, but would you slam shut your wallet if you lost your job?

If your spending went to a bare-bones job-seeking budget then your emergency fund might already stretch to six months.

As for the HELOC notification clause, I'd tap it first and then notify them after I had the money with another credit union. And I'd do the notification by snail mail...
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Old 09-16-2008, 02:16 PM   #11
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I'm the one who started a thread here about my HELOC freezing me out for housing value downturn. After all the libertarians here told me to suck it up and quit whining we determined HELOCs are a bad vehicle for emergency cash. I vote taking a small amount out and putting it in savings, then pay it off as you can. 3 months bare bones.
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Old 09-16-2008, 04:55 PM   #12
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I'm the one who started a thread here about my HELOC freezing me out for housing value downturn. After all the libertarians here told me to suck it up and quit whining we determined HELOCs are a bad vehicle for emergency cash. I vote taking a small amount out and putting it in savings, then pay it off as you can. 3 months bare bones.
That post made me flinch, but a while later Navy Federal happily let us draw on our HELOC for a cashier's check to buy our used Prius.

NFCU sent us a proposed HELOC modification this week for our signature. They'll let us reduce our monthly payments from 1.5% of the balance to 1% if we'll let them adjust the interest rate monthly instead of quarterly. Since we usually have a zero balance on ours, I think we're going to wait for a better offer...
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Old 09-16-2008, 06:03 PM   #13
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For what its worth, if you own a $500k house with no primary mortgage and a $50-100k heloc, I dont think anyone is going to freeze it on you.

Another benefit to paying off the mortgage...
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Old 09-16-2008, 07:25 PM   #14
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For what its worth, if you own a $500k house with no primary mortgage and a $50-100k heloc, I dont think anyone is going to freeze it on you.

Another benefit to paying off the mortgage...
Yeah well, I'm sure if I shopped around I could get another HELOC approved, but even the lowest estimate on my house was six figures above what left I have on my mortgage. It was a panic move by Etrade with the credit crunch.

If
{house in San Diego County}

Then { Close Account }
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Old 09-16-2008, 08:03 PM   #15
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Recently Chase notified us that our HELOC was frozen due to the drop in housing values in our REGION -- not our community, not our neighborhood, not our house -- the region! When I checked with the bank, I was told that some banks -- like Chase -- are making these "freezing" decisions on broad factors, not on individual situations. Caveat Emptor!

To the OP, I'd suggest you draw down what you need from your HELOC while you can to supplement your emergency fund. Good luck!
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Old 11-10-2008, 08:03 PM   #16
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So, following up on this thread. Thanks to all who contributed their advice. I did decide to tap the HELOC and hold the proceeds in case of some future dire need. Since I have lots of equity, I rationalize that I am only putting myself into the position of someone with a normal mortgage. It is costing me a little in interest (less since rates dropped) but that nice big cash balance (partly in a CD) is comforting for sound sleep.

Another reason for the follow-up post. I just had a scary "talk" with my boss and was told that I am not regarded by the new VP and his new managers as a positive influence at work. He specifically pointed out that when higher ups ask how I am, I generally say what I'm working on and give the impression I am doing a lot of work and am very busy. He suggested I start instead giving a more positive, general reply so they will think everything is under control and I am happy to be working there. While he didn't specifically threaten my job, he mentioned several others who were not regarded as "happy" enough with their work and are now being let go.

I'm not thrilled with this turn of events, but until I can get to FI, this job (or the income at least) really is useful and important to me. I've started looking outside and pickings are slim to none. If my new cheerful demeanor isn't good enough and I really do get sacked, I'm going to be very glad I've tapped this HELOC when I could.

Oh, and it's another reminder of why I hope to reach FIRE as soon as I can.
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Old 11-10-2008, 08:57 PM   #17
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I just had a scary "talk" with my boss and was told that I am not regarded by the new VP and his new managers as a positive influence at work.
...
While he didn't specifically threaten my job, he mentioned several others who were not regarded as "happy" enough with their work and are now being let go.
Why aren't they satisfied with workers just keeping busy and doing their work? Management usually knows that during a downturn and people are let go, the survivors do not feel well.

Can you delicately touch base with other workers to see how they are treated? It looks like management is just looking for excuses...

By the way, your drawing on the HELOC is a good move.
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Old 11-10-2008, 09:02 PM   #18
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Sounds like you need to spend less time doing actual work and more time "managing up."
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Old 11-10-2008, 09:03 PM   #19
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6 month emergency fund is a good idea and in these times 12 months.
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Old 11-10-2008, 09:59 PM   #20
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While he didn't specifically threaten my job, he mentioned several others who were not regarded as "happy" enough with their work and are now being let go.
DH had to release five direct reports today due to downsizing. He feels awful and I imagine they feel worse.
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