I believe Warren Buffet used to say that you should borrow money when you can, and not when you need to!. When you do not need money, you can borrow at favorable rates. When you you actually need them, well, that’s another story. Part of a responsible financial plan involves making sure that you have access to liquidity. Below is a list of sources that you should consider having a line for in case of emergencies.

Home Equity Line of Credit

This is one of the cheapest source of liquidity that is commonly used by most people, whether it be for renovations or other stuff. Even if you do not need any cash at the moment, it is always prudent to have an available source and this is perhaps the cheapest source.

Margin on Securities

If you have a sizable portfolio, you can borrow against your portfolio of securities. Most major wireline brokerages allow you to do that. This is very useful if you need temporary cash but do not want to liquidate your portfolio. For example, an executive with lots of company stocks may want to keep that concentrated position for the moment and not incur any capital gains tax. Yet, he or she may face a tax bill and needs immediate cash. Borrowing against your portfolio is one way of accessing cash without having to liquidate your portfolio. Very often, the very wealthy can get 0% financing on a vacation home by borrowing against his or her portfolio. If you have an account with a brokerage, then you should consider setting up a loan margin account (just in case you need to use it).

Line of Credit

You can always get a line of credit from a bank. How much and what rate you are charged will depend on your banking relationship and your credit score. But establishing a line of credit with your bank is another source of liquidity that you should tap into.

Credit Cards

Yes, your good old credit cards also offers you a source of liquidity provided you have not used up all your credit! For those who PIF (pay in full) and utilize just a fraction of your total credit, then your credit cards really serve as tool that you can use should you need cash. The rates are obviously higher than both a HELOC or Loan Against Your Securities. So rather than looking at credit cards as evil (as some do), look at it as a source of convenience and liquidity when you need it.

Your own emergency fund

Well, everyone should have at least six months to one year’s of emergency fund. You should set aside an emergency fund before you even think about investing. Should anything happen, don’t feel bad spending it. Afterall, that is why you have this fund.

Lessons

We do not know when we need some extra cash due to some emergencies. Having it is always prudent to have access to liquidity when we need it. But we have to set them up now and not when we actually need it. The list above highlight some of the ways that we can access liquidity and you should be looking to get these set up now. In particular, getting a HELOC, setting up a loan margin account, a line of credit, and having the right amount of credit available from your credit cards are things that you should work on right now.

This entry was posted on Thursday, May 3rd, 2007 at 1:54 am and is filed under Personal Finance, Tips and Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.