Everyone knows that they should have an emergency fund set up, yet the reality in today’s economy, with rising costs on everything from a gallon of milk to a gallon of gas, is that many Americans are just getting by. That means that for many of us, saving up the needed funds for an emergency fund can be almost impossible. How can you save for an emergency fund if you are barely getting by? Ask for a raise? Raises are not being handed out as freely as they once were. Many of us are trapped in our current income levels.
This means more and more Americans are needing to turn else where to build up that precious emergency fund. But where do you turn to? Sure in a crunch there is credit cards, and personal loans, but these can have a high cost. You could use a Roth IRA as both a retirement account and double purpose it as an rainy account for when emergencies happen. Yet this can potentially put your retirement savings in danger, and there are risks to that strategy.
What if you have a high income, own a property, and are the type that can avoid temptation? There is always the option of setting up a HELOC or Home Equity Line of Credit to serve as a pool of funds to use in any emergency that might come your way. Sure this also has its risks, but so does any financial transaction. The only way this method truly works is if once you set the HELOC up that you never dip into it except for actual emergencies and not that new stereo system for your car that you have had your eyes on for the last year. It is all to easy to justify putting purchases and other expenses on credit.
HELOC’s benefits include lower interest than many of forms of credit. This allowed you to divert your cash flow to living costs or better yet to investments and putting that money to work for you. When you have funds sitting in a savings account for an emergency fund, that money is doing you very little in terms of interest or gain. The money that would have sat in the low interest savings account can instead be better leveraged elsewhere. I am a firm believer that no dollar should ever sit and languish, but instead should be out to work to improve your cash flow.
Another benefit of using a HELOC as an emergency fund is the fact that the repayment terms are pretty flexible. You also only need to draw from the account the amount you need, when you need it. This allows you to withdraw only what you need, when needed, avoiding having to take out large lump sums with high interest rates. The interest on a HELOC is also tax deductible, making it a perfect option for an emergency fund.
Another option if you find yourself always spending the money that should go into a savings account is to take out a personal loan. Then stash that money away in a savings or a money market account, and pay off the loan each month. The key here is not to spend or touch the money if it is not needed. This method of taking out a personal loan to build a emergency fund should be a last resort method for those who simply do not have the will power to save up to create such a fund, or expect to potentially need an emergency fund in the next year due to life circumstances.