Why is having “Rainy-Day Money” important? We may have to deal with the uncertainties of life: a job loss, sudden injury or illness, family issues abroad and the cost of travel, etc. Three months is no longer adequate and a longer range of 9-12 months’ worth of living expenses in cash is recommended. However, borrowing against other sources would allow more of your cash to earn more in interest. There are four sources of emergency cash to consider:
Emergency cash fund
Obviously, this is cash on-hand, the most liquid, and the most easily accessible – without cost, delay, risk, or penalty. Savings or money market accounts are the best places to hold this type of cash.
Home-equity line of credit
A home-equity line of credit is a form of revolving credit where a person’s home serves as collateral. As such, equity credit lines should be reserved for major expenses such as education, home improvements, or medical bills and not for daily expenses.
Brokerage margin account
This option is not for the faint of heart unless you have an understanding, or are at peace with, the advantages of leverage and increased risk.
A margin account allows you to buy securities, at credit, with money borrowed from the broker, allowing you to buy stocks without having to pay the total price in cash. The poor performance of some stocks in the market can help you. How? A technique called short selling can help. It is the opposite of investing as people generally understand it: investors that engage in short selling makes money only when a shorted security falls in value. If you have a number of securities that are not performing well when you need sudden access to your rainy-day money, you are in luck.
Cash-value life insurance
Cash-value life insurance combines term insurance with savings and are more expensive than term-life insurance. Policyholders receive the cash surrender value when cashing in the policy and will not have to pay income taxes on it. If you borrow against the policy, however, interest would be charged.
You can plan a number of things down the road such as tuition for college and retirement. However, life’s uncertainties come out of nowhere, and the best that we can do, just in case, is set up rainy-day money and become better aware of the collateral, investments, and insurance policies that can serve as part of that temporary, emergency source of cash.