Lots of experts suggest saving six months’ living expenses for emergencies like a job loss or an illness. But if you’re in a financially stable household it makes more sense to use that money elsewhere, and open a line of credit to draw on in the event of a crisis. “Holding a large amount of cash as an emergency fund can be a real waste,” explains Toronto fee-for-service planner Jason Heath. “If you have cash and debt, your cash won’t earn nearly the return that your debt is costing you—meaning, you’re falling behind.” Consider what happens if you take $20,000 of emergency money from your high-interest saving account and instead apply it to your mortgage in the following example:
Over the course of 10 years, you’d lose out on more than $6,400 in interest savings if you go the cash route. But even if you don’t have debt, notes Heath, why hold cash when you can get your money working for you by investing it? Provided you don’t fall into the trap of constantly raiding your line of credit instead of using it as an occasional emergency fund, that’s always the wiser choice.
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