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Emergency Fund with open LOC

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  • Emergency Fund with open LOC

    Hi all - newbie here, to both WCI and the world of personal finance. I'm a new PGY1 in Canada who is trying to learn all I can to get me set up on the right track for the future, and properly arrange my priorities.

    I carry 2 different student loans - provincial/federal combination with a max interest rate of prime+1%, and an open professional student line of credit at prime-0.25%. I've been reading general personal finance things about the importance of an emergency fund, and completely understand why they're really important! But I'm wondering about the financial advisability of creating an emergency fund when I am still able to draw on my LOC (which, according to the bank, is at least until end of residency, and could be forever as it can be converted into a personal LOC).

    On the one hand, the whole definition of an emergency fund is for any emergency that comes up, including any (hopefully very unlikely) scenarios that would prevent me from completing residency and potentially losing access to the LOC. On the other hand, I am a debt-averse person, and being able to put more money towards paying down debt of at least 2.20% versus having it earn a likely max of 1% in a HISA feels like a net gain. On the other other hand, having to go more in debt in case of an emergency seems like an odd move for a debt-averse person.

    What do you all suggest? Any and all input is appreciated! I have tried reading to find if this has been discussed on here before but haven't come up with anything.

  • #2
    you split the difference. your efund could be 500, 1000, etc. doesnt have to be 6mo at the start.

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    • #3
      The difference is EF is an asset and the LOC needs to be paid back.
      Try to pay emergency expenses out of assets EF. Build as you can.
      That LOC is convenient, but is equivalent to a low interest credit card. Avoid building debt. Live within your means. Philosophical point of view.

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      • #4
        +1 with Tim. Debt is debt. LOC that's not tied to an asset (eg HELOC), is just another debt. Little difference between LOC and credit card draw. That is no an EF. When starting off -- not recommended. Debt sucks. no money when an emergency hits -- worse.

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        • #5
          Thanks for the responses! Tim and StarTrekDoc, good point, I hadn't really looked at an LOC as like a credit card - I guess it's easy to get casual with debt when everyone's telling you it's always there.

          And thanks Peds, that's a reassuring thought. I will start with that attitude and begin setting up an EF!

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          • #6
            Borrowing money now so that you don't have to borrow it from the same place later seems rather foolish. When I was at your stage I kept enough money to cover my cash flow needs and made sure that I had credit available in case of an actual emergency and put the cash into assets/debt repayment. Thirty years later I still do the same thing and have never needed to access that credit despite illnesses, job losses, house and car repairs, etc. Don't borrow money to leave it sitting in a bank account earning less than the interest you are paying on the loan.

            In reality all my emergencies were covered by a combination of my paycheck, rapidly slicing expenses when anything happened, and the three week grace period on my credit card before paying it off in full.

            Edit: I would also say that you should also get a credit card and keep it in the freezer except for an annual transaction to keep it active. LOCs tend to get pulled faster than credit cards in times of strife and it is a good idea to have an alternative in place for a true emergency.
            Last edited by Shant; 08-09-2020, 03:12 PM.

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            • #7
              Originally posted by Shant View Post
              Borrowing money now so that you don't have to borrow it from the same place later seems rather foolish. When I was at your stage I kept enough money to cover my cash flow needs and made sure that I had credit available in case of an actual emergency and put the cash into assets/debt repayment. Thirty years later I still do the same thing and have never needed to access that credit despite illnesses, job losses, house and car repairs, etc. Don't borrow money to leave it sitting in a bank account earning less than the interest you are paying on the loan.

              In reality all my emergencies were covered by a combination of my paycheck, rapidly slicing expenses when anything happened, and the three week grace period on my credit card before paying it off in full.

              Edit: I would also say that you should also get a credit card and keep it in the freezer except for an annual transaction to keep it active. LOCs tend to get pulled faster than credit cards in times of strife and it is a good idea to have an alternative in place for a true emergency.
              Honestly this was what I was wondering in the first place! I'm firmly interested in investing a small amount monthly, because the markets basically always do better than my currently-sub 3.5% loans, but savings accounts don't generate that same return, which is why the debate.

              It seems a little philosophical to me - as in, is it better to have any assets, or is it better to strictly look at the numbers and take the biggest return? Both sides seem sensible perspectives to take.

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