So if an emergency fund is a racket and BAD IDEA (as thoroughly covered here and here) what do I do? I don’t keep an emergency fund, but I do keep quite a bit of accessible funds around. These aren’t liquid funds kept in an account I can access at will, but they are mostly liquid, and mostly invested, funds I can access with minimal effort and a little bit of time. I’ll walk through the components, their balances, and their uses in bullets below, then talk a bit about why I do it this way and some goals for the future.
Here are my accessible cash buckets:
- A $20,000 HELOC on my prior owner-occupied home. This is a critical pool of money as it was the seed money I used to start real estate investing, and I recommend everyone get one if they’re a homeowner. The rate on a HELOC is generally very low, the interest can be (depending on current tax law) deductible, and they last a long time. I set mine up in 2009 and I can draw on the balance until 2024. I currently have about $12K in available credit I can use for any purpose, at 5.25%. I generally use this as a sweep account. When my paycheck is deposited I put all of it (minus a $300 minimum balance in my checking account) into the HELOC and draw out money over the course of the month as needed. This gives me the flexibility to pay off other larger bills if needed (and eliminate double digit credit card interest rates as needed) without moving money out of investment accounts, which is particularly helpful for repairs on my rentals that can’t be covered by real estate cash flow, or if I want to pay off a higher-balance loan. For everyday spending a HELOC is a great tool when linked to your primary checking account. One difference between this bullet and the others below – I don’t treat the available credit as true accessible cash (because it’s credit, not cash). When we get to the totals you’ll see what I mean.
- A $1,000 savings account I keep at my bank, linked to my primary checking. If there’s an overdraft on my primary checking (which happens, particularly since they changed to a new online banking system and lost some critical functionality) this will cover the overdraft automatically. That gives me time to transfer funds out of my HELOC (scheduled transfers out of the HELOC is one piece of functionality they lost and it really screwed me) to cover any bills. I’ve also started adding reminders to my todoist for transfers I need to make. Not as convenient as online banking actually working, but a fix.
- Of my current approximately $27K ROTH IRA balance, $18K is contributions I made in 2019, 2020, and 2021. ROTH rules allow the contributions to be taken out tax free at any time. If I wanted to take out the growth (which I would only do in the most dire circumstances) I would need to pay taxes and a 10% penalty. But, if I just want my money back I can take that at any time. While funds are in the ROTH they grow tax-free as well. This is particularly advantageous as one of my main holdings is NLY (most comprehensively covered here) which has a roughly 11% non-qualified dividend. If I kept that in a non-tax-advantaged account, those dividends (roughly $1,263 in my ROTH for 2020) would be taxed as ordinary income. In a ROTH they’re tax free. My primary emergency funds will always be in ROTH for that reason. I can park my money and it can grow for retirement while still being accessible. I came to this realization in 2019 though, and I wish I had thought of it sooner as I probably could have max-funded 2018 too and had even more money socked away.
- I have about $8K in a brokerage account, and this is what I ‘save’ to every month. I keep this in VTSAX as that’s going to be about as stable as it gets, has a little bit of a qualified dividend so it can still grow, and is very liquid so I can access the money in a few days if needed. I originally planned to use these funds to fund the ROTH in January, but I realized these funds are all short-term capital gains at this point. So, I’ve instead funded my ROTH from my HELOC. Long-term I’ll be able to use this in following years to fund my ROTH as these shares transition to long-term capital gains. I don’t believe I can straight convert the shares from brokerage into ROTH through Vanguard (where this is held) but it’s something I’m planning to look into in 2022.
- I can take a loan against a fully-paid whole life insurance policy my parents opened for me when I was born (common at the time). There is a little over $4,600 in cash value on the account and the loan is offered at 6%. Not a great interest rate, so I don’t want to use this, but I will if I have to. Nice thing about these loans is they’re not subject to approval – since it’s a loan against cash value they just give you the money no questions asked.
- Finally, I have about $2K in leftover Disney (DIS) stock I bought when they discontinued their paper certificates. I figured those last paper certificates would have collectible value down the line, so I bought three shares (all I could afford at the time). Those three, with some additional contributions and dividend reinvestment, have grown to 11.42 shares over time. These would likely be the last thing I sell, but in a pinch I would do it. I’m no longer contributing to more DIS shares, but I dearly hope they reinstate their dividend soon. Contributions are subject to a (pretty large) fee, but dividend reinvestments are not, making growth over time fairly cheap if you’re going to hold a stock forever.
- A note about credit cards: I generally don’t treat my credit card available credit as cash to be used unless I’m putting another property on board and might need to tap some of those lines. If I do use those lines I generally try to access through a 0% offer.
- From the above all told I have about $46K in cash I could put my hands on without penalties, and relatively quickly (call it within a week). Keep in mind this total doesn’t include credit cards. Those I can use for bridge funding until my cash lands in my checking account, or additional reserves as needed.
- The above also doesn’t include any funds from my real estate or collectibles businesses, but those aren’t a big factor in cash flow at this point. Neither of those makes a huge amount of money (in fact they both cost me money out of my personal funds on a yearly basis) but there are some funds that could possibly be tapped there as well. That would be off the sheet at the bottom of the list though because I’m wanting to build contingency funds in these areas (particularly in real estate) and I’m working to ensure those businesses will each cover their own spending in 2021.
So why do I do it this way? Primarily it’s a legacy of being poor for decades, having significant remaining debt, and still being cash poor. For most of my working life I’ve been paid absolute shit (the phrase getting screwed with your pants on fits). Note this isn’t a dig against my employers – that’s just the nature of the world. That’s only really turned around in the last few years as I’ve worked at the University. I took the reasonable (to me) risk of investing in real estate before I had a cash cushion because if I had waited to be stable financially I would still be waiting. I’m single with no family, so I’m able to take risks someone else might not be willing to, and you tend to get paid for taking risks.
This is already a long post, so I’m going to end it here, but I’m going to dissect the paragraph above in future posts. I’ll try to aim for shorter posts for these, so I don’t make your eyes bleed. Hope you’ve enjoyed, and ask questions!
