19 Mar Can I use a HELOC as an emergency fund?

Q. I own my house with no mortgage. I have decent retirement savings but not a lot of cash. I’m having a debate with my wife over whether our HELOC counts as an emergency fund or if we need actual cash in the bank.
— Cash-poor homeowner

A. Having an emergency fund is an admirable goal.

It can come in handy for surprise expenses, saving you from charging something on high-interest credit cards and more.

The problem with using a home equity line of credit (HELOC) as an emergency fund is that you’re adding to your debt, said Bill Connington of Connington Wealth Management in Paramus.

Normally you would like to have three to six months of your fixed expenses available for emergencies, he said.

He said some can be in cash and the rest could be invested, but the investment would have to be something where it can be liquid quickly and without risk, he said.

“A HELOC would be a way to get at money, but not what a wealth advisor like myself would consider your cash for fixed expenses,” he said.

If you have no cash on hand and you have to use a HELOC, if you have been laid off, for example, you’d still have to make payments on the loan, he said.

Compare that to cash on hand, which allows you to just pay your expenses, he said.

He said using a HELOC if you lost your job would give some added stress by giving too much of an open-ended time frame to get a job.

“With the cash, you know you have three to six months to handle the finding of a new job,” he said, and it won’t put you in debt during this financially challenging time.

So can a HELOC be a backup plan? Sure, but it shouldn’t replace a bank account for emergencies.

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This story was originally published in March 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.