Is there an advantage to keeping a liquid emergency fund if one also has an untapped line of credit?
"People treat an emergency fund as some kind of ace-in-the-hole when it comes to financial difficulty, but it is only one of many sources of money that you can utilize. What is an emergency? First, you have to define what an emergency is.  Is it a lost job?  Is it an unplanned event (pregnancy, perhaps)?  Is it a medical emergency?  Is it the death of you or your spouse? Also, what does it mean to be unplanned?  Is being so unhappy with your job that you give a 2-week notice an emergency?  Is one month of planning an emergency?  Two? Only you can answer these questions for yourself, but they significantly shape your financial strategy.  Planning is highly dependent on your cashflow, and, for some people, it may take them a year to build enough savings to enable them to take 3 months off work.  For others, they may be able to change their spending to build up enough for 3 months in 1 month. Also, you have to consider the length of the emergency.  Job-loss is rarely permanent, but it's rarely short as well.  The current average is 30.7 weeks: that's 7 months! Money in an Emergency There are six main places that people get money during a financial emergency: A good emergency strategy takes all six of these into account.  Some emergencies may lean more on one source than the other.  However, some of these are correlated. For example, in 2008, three things happened:  the stock market crashed, unsecured debt dried up, and people faced financial emergency (lost jobs, cut wages).  If you were dependent on a stock portfolio and/or a line of credit, you'd be up a creek, because the value of your investments suddenly decreased, and you can't really tap your now significantly limited line of credit. However, if you had a one or more of cash savings, unemployment income, and unemployment insurance, you would probably have been OK. Budgeting for an emergency When you say ""financial emergency"", most people think job loss.  However, the most common cause of bankruptcy in the US is medical debt.  Depending on your insurance situation, this could be a serious risk, or it may not be.   People say you should have 3x-6x of your monthly income in savings because it's an easy, back-of-the-envelope way to handle most financial emergency risk, but it's not necessarily the most prudent strategy for you. To properly budget for an emergency, you need to fully take into account what emergencies you are likely to face, and what sources of financing you would have access to given the likely factors that led to that emergency. Generally, having a savings account with some amount of liquid cash is an important part of a risk-mitigation strategy.  But it's not a panacea for every kind of emergency." An emergency fund is your money, sitting in a bank, that you can use for emergency purposes. A line of credit is somebody else's money, that they've provisionally promised to let you borrow.  But they can change their mind at any time. Stop trying to make money with your emergency fund. It's purpose is to sit there idly waiting for a bad day. A day when you need that cash (liquid) not in a bank or a line-of-credit. The few dollars you might make trying to chase interest/investments with your emergency fund aren't worth it if a true emergency came up and you couldn't get to your cash in time. Once you have a fully funded EF then start investing heavily. That's your future game plan. Not the EF. recommend keeping some amount of money in cash as an emergency fund I see two keywords, with two interpretations here. Cash: Emergency: 1 + 1 is rarely a problem. Even if it takes a couple of days to sell reliable investments. 1 + 2 is a rather large problem. You need to leave town, today, because the town won't be there tomorrow. You're out of gas, and the phones are not working. The guy minding the local service station with an AR-15 can't process your Amex Centurion card and would prefer actual cash. I live in an area prone to earthquakes and cyclonic storms. The last large one didn't knock out anything major, but the cash machines emptied out rather quickly. We keep a month's income in cash in the house, and I have a spare tank of gas in storage*. As others have said, there is no single answer for everyone. But do consider what you take for granted and what happens when it goes away.  *Change it every 2 months - common gasoline is not chemically stable Why can't you have both? If you do have both credit and an emergency fund, and an emergency occurs, you can draw from the line of credit first. Having debt + cash is a much more stable situation than having neither, because then you have the option to use the cash to pay off the debt, or use the cash to pay other expenses. If you just have cash, when you spend it it's gone and there's no guarantee anyone is going to lend you any money at that point. Let me offer what I did in a similar situation - Two points (a) we were banking $20K/yr or so to the cash fund, 2 good incomes, and the ability to go indefinitely on just one of the 2. (b) A HELOC that was prime-1.5%.   The result was to mentally treat the HELOC as our emergency fund, but to enjoy the interest savings of over $16,500/yr for the $100K that had a sub-1% return.  When I first referenced this story, I came under criticism. Fair enough, it's not for everyone. Let's jump ahead. We owe $228K @3.5%. We had tapped the equity line for brief periods, but never over $20,000. When we lost our jobs, both of us, we had hit our number and are semi-retired now. Our retirement budget included the current mortgage payment, so we are in line for that dropping out of the budget in 12 years, and starting social security after that, which I did not include as part of the budget.  Note - when we lost our jobs, the severance was 6 month's pay, and we collected unemployment as well. The first 12 months were covered without tapping our retirement funds at all. So, to Nick's point (and excellent answer) our first line of defense against unemployment was this combination of severance and unemployment insurance.
Fifteen thousand dollars is not a whole lot of cash.  It should probably be kept liquid.  To that end, savings accounts and certificates of deposit (CDs) are typically used.  (There are also money market funds, but I am not sure that makes sense once trading costs are figured into the equation.) I would set some of that money aside, for an emergency fund.  (Start with at least 6 months of realistic living expenses  and also consider a fund for unforeseen emergencies.)  I would consider using 2-3 thousand to setup a retirement account.  The rest, I would place into CD ladders, so that it is somewhat accessible. While there have been plenty of good answers I would like to suggest turning it on it's head--the problem is one of perception. Other than in terms of cash-type emergency funds (my general policy is to have enough cash to get home, however far from there I might be) I consider available credit + assets that can be liquidated reasonably quickly to count as emergency fund money. "For some people, it's easier to stick to a budget if they have separate checking and savings accounts because they can deposit funds directly into their savings account and not have those funds accessible by debit/credit card, checks, etc. This allows people to pay themselves first and accumulate savings, while making it slightly more difficult to spend those savings on a whim. One a more technical/legal note, one key difference in the United States comes from Regulation D. §204.2(d)(2) of the law limits you to six withdrawals from savings and money market accounts. No such limit exists for checking accounts. Regulation D also forbids banks from paying interest on business checking accounts.  In the simplest case, checking accounts and savings accounts are a tradeoff between liquidity and return. Checking accounts are much more liquid, but won't necessarily earn interest, while savings accounts are less liquid because of the withdrawal limits, but earn interest. Nowadays, however, sweep accounts blur this line somewhat because they function like checking accounts, in that you can write an unlimited number of checks, make an unlimited number of withdrawals, etc. but you can also earn interest on your account balance because some or all of the funds are ""swept"" into an investment account when not in use. The definition of ""in use"" can vary from business to business and bank to bank." "You could put in in a Money Market Fund. These are designed to always be $1 per share, and not lose money. Of course, it still, very rarely, happens and is called ""breaking the buck"" when they do.  Sounds like the high yield savings is the way to go. The rates will be the same as what you can get from a Money Market Fund, but you also have the added advantage that the account is FDIC insured. BTW, using a Roth as an emergency fund is a terrible idea. It is true that, since you already paid taxes on your contributions, you can withdraw those contributions without incurring penalties. However, you have to file paperwork to do it, and since it's not common, the IRA custodian is likely to screw it up. Plus, you have to keep track of what were contributions, and what was investment returns, to not run afoul of the penalties. And it will take time to do it, which you may not have in an emergency. Considering you're only looking at getting 1% interest anyway, there's no reason to use a Roth account as an emergency fund. You can set those same automatic deposits into a savings account." "I would undoubtedly sell the investments if they are positive, maybe even a little negative.  That's what non-retirement investments are for, building wealth to spend, give, etc. Flipping things may put it in perspective.  Would you borrow money or liquidate your emergency fund in order to invest in mutual funds? If you can completely ignore risk then this MAY make sense. Let's say if you could borrow money at 3.75% and had a ""guaranteed"" investment return of 7.5% and a ""guaranteed"" source of income (job). But mutual funds (stocks, bonds) aren't even guaranteed to make money and they most definitely can lose and lose big. Also, I hope your job isn't in any way tied to the oil industry. On the other hand, if you take a loan and fall on hard times you can liquidate your mutual funds to get out of the bind, but you are at the mercy of the market and the worth of your investments at that point.  So it may come down to whether you want to choose when to spend your investments, when they are up or at some future date when they may be worth much less (or much more)." I would not be concerned about the impact to your credit rating.  You already have an excellent credit score, and the temporary change to your utilization will have minimal impact to your score. If you really need to make this $2500 purchase and you have the money in the bank to pay for it, I would not recommend borrowing this money.  Only put it on the credit card if you plan on paying it off in full without paying interest. Let me ask you this: Why do you want to keep this $2500 in the bank?  It certainly isn't earning you anything significant.  My guess is that you'd like to keep it there for an emergency.  Well, is this $2500 purchase an emergency?  If it is necessary, then spend the money.  If not, then save up the money until you have enough to make the purchase.  It doesn't make sense to keep money for an emergency in the bank, but then when one comes up, to leave the money in the bank and pay interest on your emergency purchase. If you make this emergency purchase and another emergency comes up, you can always (if necessary) borrow the money at that time.  It doesn't make sense to borrow money before you need it. That having been said, I would encourage you to build up your emergency fund so that you have enough money in there to handle things like this without completely depleting your savings account.  3 to 6 months of expenses is the general recommendation for your emergency fund.  Then if something unplanned comes up, you'll have the money in the bank without having to borrow and pay interest. My take on this is that this reduces your liquidity risk. Stocks, bonds and many other investment vehicles on secondary markets you may think of are highly liquid but they still require that markets are open and then an additional 3-5 business days to settle the transaction and for funds to make their way to your bank account.  If you require funds immediately because of an emergency, this 3-5 business days (which gets longer as week-ends and holidays are in the way) can cause a lot of discomfort which may be worth a small loss in potential ROI.  Think of your car breaking down or a water pipe exploding in your home and having to wait for the stock sale to process before you can make the payment. Admittedly, you have other options such as margin loans and credit cards that can help absorb the shock in such cases but they may not be sufficient or cause you to pay interest or fees if left unpaid. I use an offset mortgage. (No interest is paid, but the amount in the savings account is subtracted from the outstanding mortgage amount before interest is calculated, so the mortgage is paid off faster by the interest amount saved). The money is instantly accessible and there is no tax as the benefit is reduced/saved interest. However, the mortgage rate is slightly higher, so it works best if your emergency funds are a reasonably large proportion of the mortgage amount outstanding.