Alternatives to emergency funds: lines of credit

With high inflation, keeping an emergency fund isn’t wise since your cash will lose its value over time. Over the past year or so, I’ve been looking for smart alternatives to emergency funds that also provide the liquidity and flexibility of holding cash.

Home Equity Line of Credit

The first method I found was a home equity line of credit, which is basically a loan against the equity you have in your home. Unfortunately, I just refinanced my home to an 80% LTV and, during the COVID pandemic, no one was allowing HELOC loans that would make the total loan amount above 80% LTV. Thus, I was out of luck.

Additionally, I couldn’t find any HELOC loans that were competitive with my ~3% interest rate mortgage, so I stopped looking for HELOC loans. Generally, a cash-out refinance would be better than a HELOC loan if you haven’t done so already. Of course, relying on a HELOC won’t work if you don’t have a home to begin with.

Portfolio Margin Loans

Instead of borrowing against your home, you can borrow against your stocks. Margin loans are sometimes marketed as a means to borrow to buy stock, but you can actually use it to borrow against stocks you already have. However, if your portfolio loses money, your stocks may be margin-called and automatically sold, so you need to be aware of this risk. I don’t recommend using margin to buy stocks (though it is helpful when you are trading stocks before the stock transactions settle).

An additional benefit of portfolio margin loans is that these loans do not show up on your credit report. There are also no fees other than the interest paid.

The lowest margin rate I found was Interactive Brokers’ rate of 2.6%. However, my favorite portfolio line of credit is Wealthfront’s Personal Line of Credit, which has a maximum interest rate of 3.7%. You can easily borrow up to 30% of your portfolio, which I’ve been doing for monthly cashflow adjustments to keep my cash low.

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Personal Line of Credit

HELOCs and portfolio margin loans are backed by your assets, but there are lines of credits more similar to credit cards that don’t need to backed by assets called unsecured personal lines of credit. Luckily, I found the First Republic PLOC, which had a very low rate of 2.25%.

There are, however, downsides to this PLOC. You have to maintain about 20% of your PLOC credit in your First Republic checking account, which meant that I had to move my primary checking account to First Republic (otherwise, I would just have more cash in another checking account). First Republic as my primary checking account has been fine so far, even moving from Schwab checking which provided more features. After all, this PLOC is a way for First Republic to attain customers with great credit.

I also had to stick with the 7 year payback period (after the 2 year draw period), which is the lowest payback period offered, but provided the lowest interest rate. Additionally, I just applied for the lowest PLOC amount of $60k, but you can go higher. These terms were fine for me - $60k is more than enough and I’ll just have to sign up for another PLOC every 2 years.

However, your PLOC is not guaranteed. Wells Fargo recently shut down all their PLOCs, which could happen if the banks find these lines of credits too risky. Don’t rely on only a PLOC for your emergency fund.

Apply for a First Republic PLOC and add me, Jonathan Ong, as the First Republic Bank Client in the “How did you hear about us?” section and we’ll both get $300 for this referral. Additionally, you may get a few hundred for signing up for the checking account.

O% APR Credit Cards

Lastly, a strategy you can use when you need cash is to apply for a 0% APR credit card. This might not always work for you, especially if the emergency you are experiencing negatively affects your credit, making it more difficult for you to apply for more credit. However, buying what you need on a 0% APR credit card, then paying your credit card after the promotional period with another line of credit would be a wise strategy.

Use Lines of Credit Wisely

This doesn’t necessarily I am getting rid of my emergency fund, but instead augmenting it with multiple lines of credit to allow a smaller emergency fund and access to a larger amount of funds if the need ever arises. These lines of credit allow me to quickly pay any emergencies while giving me time to assess my financial situation with a low interest rate. For example, I may have to pay a large hospital bill with a personal line of credit, then assess how to sell my stocks in a tax-conscious manner to pay off my personal line of credit over the next few months.

Additionally, my lower emergency fund is not offset by increased spending, but by increased investing, which allows me to have a larger portfolio loan credit limit.