I usually don’t go this far out on a limb and straight up call someone’s opinion about money wrong … but this advice sounds downright financially dangerous to me! I will state off the bat I don’t know this blogger from Adam and found the post while browsing the popular list over at pfblogs.org. Here’s my beef: Personal Finance Guide (dot org) not only recommends using a HELoC as an emergency fund, but claims having a CASH emergency fund is costing “more than you think” and goes on to extoll the virtues of digging yourself deeply into debt when an emergency happens. (Interestingly enough, a year and a half ago, this same blogger thought emergency funds were a GOOD idea.)
GASP! CHOKE! SPUTTER! This blogger even says to use a HELoC to buy groceries when money is tight! What is wrong with this picture?? Buy groceries and pay for them for the next several years??? Of all the “debt-is-good” planets people can live on, this one has to be the most hostile to personal financial wealth!
The really bad part is this blogger is not alone with this idea of using a HELoC instead of a cash emergency fund. Some bloggers are not as specific about using credit instead of an emergency fund, but the idea remains. There are MANY more examples, but these were mentioned when I brought the subject up on a blogger board I frequent.
I have said it before, I don’t think HELoCs are good for much at all. Not to “pay down” credit card debt (note the quotation marks!), and definitely not for an emergency fund. What if the emergency is a job layoff? Or a double job layoff (both you AND your spouse)? How about some idiot running a red light drunk and T-boning you, resulting in a prolonged hospital stay and time out of work? How about an injury that results in permanent disability? Even worse yet, how about a death in the family? All of these things happen to people every day in America! Are any of these situations an example of when you want to go into MORE debt?
Or here’s another real-life example this blogger obviously didn’t consider: what if you live in an economically depressed area … like maybe Michigan? What if you live in the “foreclosure capital of the USA” as Detroit, Michigan (replacing Stockton, California) has been declared lately? Or any other region where home values are plummenting as the housing market bubbles burst? All of a sudden, you might not HAVE equity in your home anymore! If that happens, using this blogger’s advice …POOF! You don’t have an “emergency fund” anymore. Even worse yet: what if you find yourself upside-down in your mortgage because home values declined?
Yes, I know cash actually does go down in value. It’s what we commonly call inflation. But I don’t think inflation is nearly as high as some of the declines in housing values going on right now. Plus cash doesn’t put you in debt. The last thing I would want in an emergency would be more bills that need to be paid … and a HELoC puts your home up as collateral. So if the emergency is prolonged and you use a HELoC, not only do you have another bill, but if you can’t pay that bill you are in danger of losing your home. NOT a good plan!
I will personally stick with my plan of a cash emergency fund. I personally advocate others do the same. It just isn’t worth the risk!