"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote:
- quote -

Granted. However, I expect that money in a liquid reserve is going to
earn less than money locked up in some long term investment. So there is
an opportunity cost and that is the point.

"Daniel T." <daniel_t[at]earthlink.net> wrote:

- quote -

I think you are spot on. Take care to keep the cost of the credit line low (not
credit cards if you can help it).

Selling losing investments will help with your taxes that year as well if they
are in taxable accounts.

You should not sell investments in tax deferred accounts except in extreme
emergencies.
-- Doug

"Daniel T." <daniel_t[at]earthlink.net> wrote in message
news:daniel_t-502B23.09490323052007[at]news.west.earthlink.net...

- quote -

Keeping cash in liquid reserve is poorly defined as being "idle". Money
Market funds are currently paying over 5% and short-term bond funds
approximately the same. I don't track T-Bills and such, but think you could
bring those home in the same neighborhood. True, that's higher than in the
recent past, and not as much as you'd currently earn in equities. Still,
it's not idle by almost any definition. I would define "idle" as monies
deposited in accounts that pay interest, if at all, below the rate of
inflation.

Elizabeth Richardson

"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:

- quote -

If your goal is to avoid debt, then the above is excellent advice. If
your goal is to reduce the cost of risk, then it may not be.

As I see it, you have three ways of handling a financial emergency:
1) Keep cash in liquid reserve (idle.)
2) Keep a credit line open.
3) Be prepared to sell investments at a loss.

Each way has a cost associated with it and in every case, the cost
depends on future unknowns (i.e., the timing and nature of the
emergency.) Because of these unknowns, the best choice IMHO is to
diversify... do all three.

I think option (1) above is best for those little emergencies that
continually come up. Option (2) is best for middling emergencies that
you know you can recover from quickly and option (3) is for the rare big
emergency that will take some time to recover from (if ever.)

I'm just getting started in all this, so I would love some feedback on
this opinion. How close am I?

On Fri, 18 May 2007 09:14:53 -0500, Will Trice
<wwtrice[at]paragondynamics.com> wrote:


- quote -

There have been some good comments on this. My own is somewhat
different in that my preference would be to set aside now whatever
cash level is desired in a liquid account.

I appreciate that the number crunchers among us frown on keeping large
amounts "unproductive", but I would counter that it is very productive
- it makes us sleep better but more importantly it ensures that our
long-term investments, together with regular contributions thereto,
can remain undisturbed. After all, I think it is that
steady-as-you-go savings over time that makes everything work.

But most of all I do not see additional debt (HELOC, credit cards or
whatever) as a problem solver - especially during periods where
financial stress already exists.


-HW "Skip" Weldon
Columbia, SC

Will Trice wrote:
- quote -

Fair Isaac (at myfico.com) says that new credit is responsible for 10%
of your score. I can't say I really know what that means. Does it mean
it contributes anywhere from 0 to 85 points, or 0 to 55 points?

Length of credit history is a 15% component of it and "average length"
and "most recent" both factor in...you're lowering those with new cards.

FI also says that the importance of any rating factor is dependent on
the other ones. They don't explain this further though. If it were my
black box I'd have something in there noticing whether a guy has a bunch
of new credit cards and just tapped into credit (vs. a few old cards,
and just tapped into credit). I have no idea if this is how it works or
whether the difference would be enough to increase your interest cost.

- quote -

Oh, absolutely...someone accumulates all of their wealth in retirement
accounts and has $3 million at age 45 in Q-plans, and nothing accessible
to buy a new car or put a roof on the house or pay for kids' college. Or
less extreme -- retirees who have "too much IRA", who are taking MRDs
they don't even want/need, who pass the bulk of it to heirs. Post-tax it
might have been better to put the money elsewhere.

Plus, plenty of cash needs come up well before age 59 1/2, and that
money should be saved up outside of qualified accounts. Even for
optimizing your after-tax, long-term savings there's going to be a
tipping point (unknowable, unfortunately) between qualified &
non-qualified accounts. You can think of examples justifying 0/100 or
100/0 and everything in between.

-Tad

Will Trice wrote:

- quote -

Will - there are two possible outcomes to an argument with one's wife,
either she wins, or you lose. The financial decision to be made seems to
boil down to X$, something like $25/yr and maybe a closing fee, compared
to a rift between you two or your wife's discomfort. Here, we frequently
talk about stock/bond mix being shifted according to someone's 'sleep
factor' (I believe 'sleep number is a registered trademark for a
mattress manufacturer), in your case, this dialog is really about very
little money, and all relationship jokes aside, it's cheap insurance.

We spend nearly $2K/yr in term life premium, $3K home insurance, $2500
for cars, $7500/yr total for events we hope will never occur. $25 or
$50/yr is nothing compared to the risk the extra line may one day help
you avoid.

Just my (final) two cents,
JOE

Tad Borek wrote:
- quote -

But this is not literally possible or wise, is it? First, it wouldn't
give me time to shop for a good deal. Second, the HELOC source I choose
may not contact my employer for employment verification that very day,
besides which, in my industry a layoff usually comes without warning (to
an individual, typically you'll know that somebody is getting booted)
and results in the affected persons getting escorted out of the building.

- quote -

My wife's income is extremely variable, mine is steady. However, a
layoff in a bad year for my wife and we'd be in deep kimchee.

-Will

Tad Borek wrote:

- quote -

Dammit, Tad, the pro-HELOC folks had me won over, now you're making me
rethink this again. The above statement is exactly the argument I used
with my wife.

- quote -

It's not clear to me that cards with no balance make a significant
difference in your FICO score. Do they? See for example this dude with
80 cards and a score of 794:
http://money.cnn.com/magazines/money...9650/index.htm

- quote -

I haven't thought about this. It seems odd that one could save too much
in qualified accounts. My retirement funds have a little over 16% in
taxable investments, with the rest in qualified accounts (I'm not
counting liquid emergency buffer in this).

-Will

BreadWithSpam[at]fractious.net wrote:
- quote -

Definitely a valid concern - but he could avoid that by opening the
HELOC the day he gets his notice at work, right? It could be a good
thing to put on the "about to lose job" checklist, but now?

Though one thing Will mentioned is that their income is variable and if
it's extremely so, the HELOC might be a good idea, period. I've had a
few clients who freelanced, or did consulting, or ran a startup
business, and they're always in that mode of not knowing if there's
going to be any income coming in during the next year. One who owns a
house does have a HELOC. Those whose compensation is bonus-driven
typically earn enough from their base to cover costs, or have enough
saved up in accessible places, or both.

-Tad

Tad Borek <borekfm[at]pacbell.net> writes:

- quote -

My concern with this is that if he's in the middle of
two years of unemployment, etc, then he may well *not*
be able to get that HELOC just when he needs it.
HELOCs will still exist, and his home equity will
likely be intact, but will he qualify?

That said, with two years of living expenses in accessible
investments and cash, the chance that he'll need to hit
that HELOC is pretty slim.

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Will Trice wrote:
- quote -

Will, it seems odd to me to go through the trouble of giving yourself
the ability to borrow a bunch more money, and take on some costs to do
so, if there's little chance you'll actually need to borrow. If you do
get to that point, you'd have what - two years to make other
arrangements - including getting a HELOC then? It's like buying up
canned goods in June in case a blizzard hits. I don't see
home-equity-basd credit going away anytime soon, if anything I expect a
big expansion in ways to borrow.

Also, you've probably been able to observe it but I wonder if all those
$25-bonus new credit cards you're collecting could end up dinging your
FICO score -- resulting in higher borrowing costs, i.e. more financial
pressure, should the need to borrow arise. In my gut there seems to be
an asymmetrical analysis of the risks here. On one hand, opening a HELOC
in case Doomsday hits (2+ years of zero income). On the other, grabbing
$25 bonuses even though they might make that HELOC borrowing rate
substantially more expensive, because you're judged to be a worse credit
risk as a result. Maybe knock it with the new cards and count on opening
a HELOC should the need arise?

Another issue here...IIRC you're a regular saver, based on prior
posts...are you perhaps saving too much of that via qualified accounts?
If you're building a non-qualified piece alongside the 401k/IRA/etc
these kinds of concerns go away, gradually. I don't think it's wise to
keep everything on the qualified side with little/no growth of
accessible investments and that may be part of this question too.

-Tad

Will Trice <wwtrice[at]paragondynamics.com> writes:

- quote -

Oh, sure. If you have, say, $100,000 in a brokerage account
(with a margin agreement) and invest every penny in stocks,
you can write a check for up to half that value (though
that may put you right at the edge of a margin call. It
varies somewhat and depends on the securities and the
brokerage, of course). You'd pay interest on that $50k
at a pretty hefty rate (margin rates go way down when
you borrow, say, a million bucks, but rates for small
margin loans are pretty harsh. At E*Trade, for example,
the current rate on a margin balance of $50k or less
is 10.24%).

Now, if you have $100,000 in assets in a margin account,
your *buying* power is more substantial than your cash
withdrawal power, since if you buy more marginable assets
inside the account, you can borrow against those, too.
With that same, $100k, you could buy another $100k of
ordinary equities.

In both cases - withdrawing cash or buying more securities,
you end up at 2:1 -- in one case, you started with $100k
equity, extracted $50k cash, leaving $50k equity invested
in $100k of securities. In the other case, you started
with $100k equity invested in $100k of securities and
bought another $100k of securities - so you end up with
$100k of equity in a $200k portfolio. In both cases,
you've borrowed money and pay interest (to your brokerage)
on it.

Note, too, that the amount of leverage possible
depends on the securities in question. They'll
typically let you borrow a lot more against, say,
treasury bonds than against equities for example.

Frankly, I can't see much use in folks borrowing
at prime+3% to buy equities, though I guess I can
see using it very short-term for cash management
purposes (ie. maintain one's positions when one
knows that some new cash is coming in *very* soon).

Note that a margin agreement potentially puts your
positions at risk - if your positions go down in
value substantially and you've got a big loan against
them, your brokerage may issue a "margin call" -
requiring you put put up some cash right now or
sell some securities. Your brokerage may even just
go and sell of one or more of your positions themselves
to meet that margin call, though they typically
give the investor a few days to deal with it before
they'll do that.

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Douglas Johnson wrote:

- quote -

Are you saying that you can take cash out of a margin account? I was
unaware that this was possible, though I guess I shouldn't be surprised.

-Will

Daniel T. wrote:
- quote -

And earlier in the thread, my advice was based on my HELOC, which was
opened at the same time as the refi, so no closing costs of any kind and
a $25/yr fee. It's not used as 'primary' emergency fund, but as a
'safety net' to bridge a short term gap. And to avoid forced stock
sales, all long term.

JOE

BreadWithSpam[at]fractious.net wrote:

- quote -

Well, I wasn't arguing in favor of the HELOC. I really had no idea how
much it would cost to open a HELOC or keep it open. I was simply
explaining what costs I would compare to determine what I would do,
given the two choices.

"Daniel T." <daniel_t[at]earthlink.net> writes:
- quote -

I see, I think we were talking past each other. You are
arguing in favor of opening the HELOC rather than readjusting
his asset mix to have more liquid emergency funds and
comparing the costs of both. I was simply saying that
opening the HELOC costs basically nothing. It looked
to me like you were somehow assigning a high cost to
opening up the HELOC, but I think I misread.


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BreadWithSpam[at]fractious.net wrote:
- quote -

There you go. Now what are the costs of liquidating enough of the OPs
investments to make his wife comfortable? Is it more or less than
$50/year?

- quote -

Not likely. I'm pretty green when it comes to this stuff

Douglas Johnson <post[at]classtech.com> wrote:

- quote -

But that isn't the choice presented. The choice, as I understand it, is
getting a HELOC compared to moving some assets into a more liquid state.

Mark Bole <makbo[at]pacbell.net> writes:

- quote -

He'd have to burn through a lot of other stuff before the
"losing your home" argument has any weight. For someone
with zero investments outside of his home and retirement
account, it might be a concern, but someone who's built
up additional assets would need to burn through all those
assets, too, before foreclosure and/or bankruptcy became
an issue. In fact, having the HELOC may be a very helpful
thing to help _keep_ as much of the equity he's got in his
house as possible. If he did run out of assets to sell
off to pay his mortgage, he'd go into default and potentially
have to sell under duress - or foreclosure and have the
bank sell it with little incentive to get more than his
mortgage balance out of it. The HELOC may provide a
cushion and the time to sell the place off in an orderly
and, hopefully, more profitable fashion, should it come to
this highly unlikely (given his existing savings and
apparent history) extreme.


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