Are you living paycheck-to-paycheck with nothing left at the end of the month to spare or save?
Are you worry that if something comes up and you don’t have the cash for it?
No matter how much you plan in life, the unexpected happens.
This is specially important and true for people living in Hawaii, which is an island. That means, we have to FLY to get to another state.
It's very sad how many times I've seen colleagues who encounter family emergencies and have no money to purchase their plane tickets to fly back to their families on the mainland.
For me, that ticket costs even more because my home is in Macau. The last time I had to purchase 2 plane tickets to Macau on the same day flight for emergency cost US$3,000. That's was 2008.
Do you have the money now if there's an emergency that you need to attend to? Major car repairs, major homes repairs, serious illness or hospitalization, loss of employment, extended elder care or long term care?
How much do you need for your emergency fund?
To prepare for life’s little “disasters,” set up an emergency fund to help pay for any resulting expenses. To determine how much you should have in your emergency fund, consider setting aside three to six months of your total expenses.
Generally, we would like to have a comfy cushy emergency fund of 6 months expenses.
Say you usually monthly expenses for all your basics – mortgage, food, grocery, health care, etc. This comes out to $5,000 per month. A comfortable emergency fund would be $30,000.
Now you must be asking, “how and where am I supposed to get that kind of money to put aside?”
First of all, you should be practicing the “Pay Yourself First Strategy”.
Second, I hope you have good credit score.
Now let’s talk about how to create an emergency fund with NO FUNDS of your own.
1. You’re going to use a “line of credit” as your emergency fund
Line of credit is very similar to a credit card. You open a credit card, which gives you a revolving credit line, which you can spend and pay off any time you want.
A line of credit does exactly that. Interest rates on line of credit are generally a lot lower than credit cards’. Therefore, it is a better option.
There are generally two types of line of credit: personal and home equity. We’re not going to talk about business line of credit.
I usually tell my clients to get a line of credit to use as their emergency fund.
If they own a home and have enough equity, I would recommend getting a home equity line of credit.
If they don’t own any homes, they can still get a personal line of credit.
Because line of credit is just like a credit card, even if you get a $5,000 line, you can use it to build up your credit score, which would later allow you to qualify for larger line.
With a line of credit, the money is always there available for you whenever you need just like a credit card. In fact, they do come with checks and credit card.
I always remind my clients that whatever they take out from the line, they have to repay it. Not that because the interest is high. It’s just that the money is for emergency only.
2. Your life insurance can be a source of emergency fund
With most permanent life insurance policy, the cash accumulation is accessible to the policy owner during his/her lifetime. This provide a good source of emergency fund.
Usually money is taken out as a loan against the cash value, so the withdraw does not trigger any tax event.
While it is a loan, meaning it required re-payment. The unique benefit of having a permanent life insurance is that policy loan does not necessarily need to be paid back this lifetime. When the insured died, the death benefit minus any outstanding loans, is paid out to the family.
Therefore, you don't want to be too aggressive and spend every dime in your cash value and let your policy lapses.