There are a handful of blog sites out there that feature what I call non-traditional advice. What is non-traditional advice? To describe, let’s look at what comprises traditional advice.
- You should be paying out less than you earn on each paycheck.
- Build up some small emergency fund. Later on, build up 3-9 months of income in savings.
- Any extra cash you receive must first target any and all debt. Often home mortgages are put last in line, but still eventually targeted.
- After paying off non-mortgage debt, max out your 401K, 529 plans, IRAs, and any other tax deferred vehicle.
- Investments should target mutual funds to avoid taking on too much risk.
- Never buy individual stocks.
- Only buy real estate if it’s cash only, and still profitable and you are willing to learn how to be a landlord or hire a property manager.
While the point is sound, in my opinion, we need access to some amount of liquidity. My rental properties are currently 75% occupied. If that dropped down to 25% through the loss of two tenants, my cash reserves in place would cover the cost of the rental mortgages until new tenants are found. My property manager could call me tomorrow and tell me there are major damages caused by a tenant who was just evicted. The unit needs to be repaired before it can be shown to new potential tenants. These are items of risk I must be ready to handle on short notice, and I was already geared up to handle before I bought them.
Or a HELOC to bail you out
One of the articles I spotted addressed this issue squarely and had a solution: open a HELOC (home equity line of credit) on one of your properties, possibly your primary residence. That way, when there is no panic, you don’t draw the money. But if something goes haywire, you can easily pull money to deal with the situation. As soon as the situation permits, perhaps through recovering rental income or distributions paid on the VNR stock I mentioned earlier, you could repay the outstanding balance of the HELOC and get back on track.
This is a strategy that could work, if you have the fiscal and psychological makeup to handle it. It would require that you not be tempted to use the HELOC for other things, like buying toys. It also means you might pay some amount of interest charges, but the advocates of such a plan would say that is washed out by the opportunity costs in not investing your money in a real wealth preserving vehicle.
Or an EIUL to borrow against
One avenue I have evaluated and may yet pursue, is to buy a small EIUL using my cash reserves. In the span of five years, I could fully fund a cash value life insurance policy, and whenever I need the cash, I can borrow against the surrender value of the policy. When things are restored to balance, I can then start to pay back the EIUL and eventually put everything back on track. Since the borrowing costs of an EIUL are around 0.1% (yes 1/10%), it sounds like a good plan. That’s even better than the current 4% rates on HELOCs.
If you are not aware, $10,000 at 4% incurs a monthly interest charge of $33. At 0.1%, that interest charge be just $0.83. Like the difference? To be fair, even the $33 isn’t much.
Of course, in the first five years, my total amount of accessible money would be less than what I started due to the front loaded expenses, but the estimate I have already previewed shows that by the end of the sixth year, I would have caught up and passed my initial cash outlay. In 15 years, my cash value will have doubled, providing an internal rate of return of around 5.6%. Assuming I make it to retirement age, and have been able to effectively pay back any loans, the fund should yield around 7%. Not bad for an emergency reserve of liquid cash, ehh?