You read that number right. That’s access to a quarter of a million in emergency funding. Here’s how.
An emergency fund is just money that is sitting around until something happens. It’s a just in case fund.
However, you can have funds outside of your own by using other people’s money (OPM). Then your own funds are not under lock and key.
Instead your money can be used to pay off debt (i.e., mortgage, credit cards, student loans, auto loans). Or better yet, your money can be invested to earn compound interest over time.
If you invest $368 a month at an 8% rate of return, over a 35-year career this could net you $1 million for retirement.
You can use a Home Equity Line of Credit (HELOC) and credit cards as your emergency fund.
I am not saying not to have cash ever or that this will entirely replace cash. A HELOC and credit cards are just added options on top of your cash.
Credit cards are self-explanatory. They are revolving accounts where you pay back what you owe, but as long as you have available credit then you can still keep spending. HELOC’s are another story.
How a HELOC works is similar, but with higher limits. Say you have a $400,000 home with a balance of $150,000 on your first mortgage and your lender is allowing you to access up to 95% of your home’s equity: $400,000 x 95% = $380,000. $380,000 – $150,000 = $230,000, your maximum line of credit limit.
What makes a HELOC different is that it allows you to borrow against your home equity, where your credit limit is based on how much equity you have in your home.
The HELOC is also not considered by the FICO score, this is in stark contrast from a credit card. The credit bureaus do consider how much you owe versus what’s available on your credit cards in factoring your credit score.
Basically, the biggest differences between a credit card and a HELOC is the underwriting standards, collateral, refinancing options, interest rates and tax deductions.
With a HELOC, you must document your income and employment. However, with a credit card, you need only provide the information.
In addition, a credit card is different because it is unsecured. Whereas, with a home, your HELOC is secured by your home equity and if you do not repay it, then your home can be foreclosed.
You can also refinance higher rate debt with the HELOC better than you could a credit card because the interest rates are lower on the HELOC because it is secured with your property. Meaning you are highly motivated to repay this debt back.
Lastly, the interest you pay on a credit card is gone with the wind. HELOC’s allow you to deduct the amount of interest you pay on your taxes. Therefore, if you pay 4.49% in interest that is tax-deductible versus 15.99% or more on a credit card that isn’t deductible, you see why a HELOC is so attractive.
Why not have access to these funds? Then, if your car breaks down, you chip a tooth, and your furnace goes out all in the same week, your covered. Oh, it can happen.
You can also have various funds that can make up your emergency money that you can pool together. For instance, a combination of $5,000 cash, $65,000 HELOC, and $30,000 credit card limits still equal $100,000 in access to funds in case of an emergency.
| Funds Access | Credit Limit | Borrowed Funds | Access | Interest Rate |
| HELOC | $230,000.00 | $ – | Instant | 4.49% |
| Credit Card | $20,000.00 | $ – | Instant | 6.99% |
| Total | $250,000.00 | $ – |
Bottom-line: You can have access to hundreds of thousands of dollars without using a drop if your own money. You just have to have the means, discipline, good credit score, and high enough credit limits to have this as a plan to access credit for use in emergencies.