The real question here seemed to be, “Is it ok to use a HELOC as my sole emergency fund?” If your low-interest savings account is not your only current option for an emergency fund, then you have not disclosed all relevant information. Basically, you should not use the HELOC as your only liquid emergency option, but if you have stocks, bonds, mutual funds, an IRA you’re willing to take a penalty on, a wealthy and benevolent relative, etc as other options, then keeping the basic savings account around isn’t so critical, is it?

While traditionally people have done too little saving AND too little of paying down debt, there is psychological value in having cash in the bank that seems intangible but can actually contribute greatly to future wealth.

I’m not sure how to put this, but you go about your day differently when you have cash reserves – it eases the mental pressure of the debt and the worries. Unless you can pay off your debt entirely with cash on hand, that cash has value as a catalyst for better feelings and better actions with respect to money. You may find better ways to invest it and make to grow — for instance, just knowing you have the money on hand for a financial opportunity will make you more apt to LOOK for financial opportunities, where you would not have if you were focused on paying down debt at the cost of all else.

Even if you are paying high interest rates on debt, the old ‘pay yourself first’ can have a remarkably positive effect on your psyche – and your future wealth, despite the debt.

Cheers, and here’s to sound financial health for us all.

I do have a mortgage, and currently it is below 3.99%, but there’s a major difference between paying down a mortgage (or student loan, auto loan, etc.) and paying down a HELOC, since you could easily borrow that money back from a HELOC while you can’t with those other types of loans. That was really the essence of my question.

This may be an ignorant question, but isn’t the rule of thumb to pay off the highest rate of interest first? And, wouldn’t the mortgage rate be higher than the HELCO (only 3.99%). By that logic, shouldn’t he pay off the mortgage early? Am I missing something fundamental? If “it’s all one pot of money with differing interest rates,” shouldn’t he attack the highest interest rates first?

(Maybe he doesn’t have a mortgage, or maybe the mortgage rate is lower than the HELCO?)

I think you are very wrong in using the argument of having a rich relative to bail you out and not having that make a difference in the argument of savings or paying the heloc being better. The argument is not as simple as ‘which produces better returns’. If it were that simple than the winner is clearly pay off the heloc because that is essesntially a gauranteed 3.99% return that you wont pay in interest.

The argument is more of a pay of heloc or save and have money to pay the heloc payments and other bills in case of an emergency. I would keep a savings that way if disastor strikes I can continue to atleast make the minimum payments on my bills (utilities, fixed expenses, variable etc).

You throw in the rich relative element and I would catagorize that as an ‘invisisble and emergency savings account’. Go pay off your heloc and if disator stikes you can hit up your relative to bail you out. Not the most dignified way but hey you’ll be out of debt as long as disator doesn’t strike.

We do save monthly into tax-advantaged accounts like (401ks and 529s). We also save a little monthly toward yearly high bills (property taxes, insurance, etc.). But we don’t save toward an un-taxed advantaged, low-interest bearing, emergency fund.

I personally can bear paying $70 per month in interest on the HELOC, while getting paid $10 on my savings.

It might be an interesting exercise to make a spreadsheet taking a fixed amount to be paid down on a HELOC and taking a monthly amount to be “saved” vs “paid” and compare which winds up being the winner after x months.

Point taken about the freezing of credit.

It is not really relevant what other sources of liquid funds I have available to me (let’s imagine I have a rich relative who would bail me out in a pinch), since that doesn’t change the answer to whether money is better stored in savings account or used to pay down a HELOC balance, does it? If your answer was going to be, “If you have enough money in some other liquid investment, it’s OK to pay down the HELOC,” then you’re basically saying that savings accounts are a poor choice for where to put money…which was my original point.

No there would not be any warning. If they gave people warnings then the irresponsible people would just borrow piles of money on the HELOC before the freeze.

Adam said: “Suffice it to say that a savings account and a HELOC are not my only two sources of easily liquidated money.”

Thats a detail we didn’t get in the original question. How much money is it? What form is that money in? Stocks, bonds, something else?

This is exactly what happened to me. Luckily it was 2+ years ago. I always maintained a small savings account, I mean small, like $1K, and relied on the HELOC (not counting 401K’s and IRA’s). It was with INDYMAC, which out of the blue froze all their HELOC’s shortly before going under. Since then I’ve accumulated almost $17K in savings and sleep so much better at night……… Get the safety net strung out underneath you and family first, and don’t ever trust the HELOC. Pay it off over time, the spreads minimal at this point, and it is tax deductible, if that makes you feel better about it.

Once again, I thank everyone for the feedback. This is my first time posting here, and it’s nice to hear other people’s opinions on such a controverisal topic, even when they are very different from my own. Clearly some people (in this forum and beyond) have been bitten by being overleveraged, so I am very careful to avoid crossing that line.

“Past performance does not guarantee future results.”

Also, to those who don’t understand having a $20k HELOC balance and a < $9k savings balance, it’s not really all that unusual. It’s very much like an auto loan, except you can re-borrow that money that you paid back if you need to. It doesn’t seem finanically irresponsible to me (the implication from those asking about it).

Say it loud, say it proud…CASH IS KING!!!!

Always keep a emergency fund and use extra money from that to pay down your HELOC. Maybe keep the emergency fund in a ROTH IRA if you dont like the zero return on savings accounts.

With such a low interest rate 3.99 that is cheap money, so pay it off slow. This advice is not 100% sinceI dont know your situation, if you already have a large ROTH IRA than pay off the heloc and use your ROTH as an emergency (as you can withdrawl the pricipal without penelty)

IMO, your HELOC won’t be frozen for all the reasons you listed. I would be curious to know how many readers have had their HELOCs frozen by big banks compared to small banks. And you’re correct, it is fundamentally different than other loans, I’d pay away.