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<p>If your expenses are $20k a month, then that means you’re spending $200k a year on expenses. Those people are far and few between.</p>
<p>Where do you bank? I have a Discover Bank where I get 0.80% interest.</p>
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<p>So you would rather pay interest on a HELOC and 10% penalty and ordinary income taxes to take money out of your 401k then have an 8 month emergency fund saved?</p>
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<p>You only pay interest on HELOCs if you have tapped the line of credit, so generally they don’t cost anything since people don’t generally have actual emergencies. </p>
<p>From what I understand, when you use your 401(k), you borrow against it, so you repay with interest. The interest you repay goes to yourself, so there isn’t much of a penalty if anything.</p>
<p>The bigger picture is that if your expenses are 200k a year, and you have a single source of income, you had better be able to quickly reduce those expenses or have an emergency fund (even at low interest rate) because if your hubby is an exec who loses his job, then you’re in a world of hurt. Most people with 200k a year in expenses have multiple income sources which minimizes the size of emergency fund they need.</p>
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<p>Where did you hear that from? You will always have to pay interest.</p>
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<p>This is only true in certain situations: </p>
<p>When is a 401k Distribution Not Subject to the 10% Penalty?</p>
<p>There are only a couple of situations where the IRS will waive the 10% 401k early withdrawal penalty, i.e., a withdrawal prior to the participant reaching age 59½.</p>
<p>Amount of your unreimbursed medical expenses greater than 7.5% AGI ( IRC §72(t)(2)(B) ).</p>
<p>There is a Qualified domestic Relations Order (QDRO) from the courts that mandate funds from your account go to a former spouse, child, or dependent ( IRC §72(t)(2)(C) ).</p>
<p>You have separated from service and were at least 55 years of age when you did so (or separated from service in the year in which you turned 55) ( IRC §72(t)(2)(A)(v) and 72(t)(10) ).</p>
<p>You have elect a Section 72(t) distribution.</p>
<p>You are totally disabled. (The key to the disability exception seems to lie in the permanence of the condition, not the severity. Therefore, to claim this exemption you have to furnish not only information proving that you are totally disabled, but also information on the permanence of the disability.) ( IRC §72(t)(2)(A)(iii) )</p>
<p>You have died and your beneficiary gets the money ( IRC §72(t)(2)(A)(ii) ).</p>
<p>You have made contributions under special automatic enrollment rules that are withdrawn pursuant to your request within 90 days of enrollment ( IRC §414(w)(1)(B) ).
Certain distributions to qualified military reservists called to active duty (IRC §72(t)(2)(G) )</p>
<p>Because of an IRS levy of the plan ( IRC §72(t)(2)(A)(vii) )</p>
<p>Certain corrective distributions</p>
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<p>I don’t think you understand how HELOCs work. You get one, and the bank mails you a checkbook. Then you write a check, and the bank pays the check and you take out a small loan against your home. Sometimes they send you an ATM card and you can withdraw money using your home equity as your credit. If you don’t withdraw money, you don’t pay interest. It’s simply how they work.</p>
<p>I have a $15,000 unsecured line of credit through my bank. I’ve had it for 6 years, and I have paid a total of $70 in interest, which was the total of cost of the interest for the money I used to buy a new vehicle when my other one wrecked. The $70 was well worth the convenience of having readily available money for something just like that.</p>
<p>Because it’s there, I’m able to invest in slightly risker invesetments than if I needed to have $15,000 cash sitting in the bank. </p>
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<p>I’m not talking about taking a distribution. I’m talking about taking a loan against your 401k and paying it back. That’s exempt from the 10% distribution penalty.</p>
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<p>Yes, they do cost something. You spent $70 in interest.</p>
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<p>If you borrow from your 401k, you repay the loan with money that you already paid taxes on. Therefore, you end up paying income tax twice on the money that you use to repay the loan.</p>
<p>Insomnia, you are confused apparently…engi4life, perhaps crew on his Heloc once, paid the interest ,and now has no balance…they could easily have recouped that by investing with a bit of risk…i see cery little reason to have 6 months living expenses tied up for an event that likley won’t happen…1500 for a sewer repair would come from day to day living costs,not an emergency fund…maybe you have a different view of emergency then others…emergency to me is job loss, disabling illness, 5 figure repairs…</p>
<p>In order for that to work, qdogpa, you have to make enough money to be able to pay $1500 out of your everyday living expenses budget rather than an emergency fund. I sure don’t. To me, $1500 would be a big emergency. </p>
<p>And if my boyfriend did lose his job, we certainly wouldn’t want to be living on credit until he could find another one. That would cost a fortune real quick that we’d have to pay back on top of our regular living expenses once he got a new position. We can’t afford to live that way, we have to have no strings attached cash at the ready.</p>
<p>People should budget for repairs,as that is just part of home ownership…repairs are not an emergency in my opinion…keepng 2000 on an account to pay for unexpected costs,ok…keeeping 20k in an account earning zero, when i could protect myself with a HELOC for a true emergency is not something i’d do…i take that money and place it in a tax advantaged account</p>
<p>I would like to point out to insom that I have already stated that I am saving half of my income. It’s not like I don’t have savings. I have enough money to pay all my bills through at least December if I were suddenly to lose all my jobs. I have three so that’s not likely.</p>
<p>I choose to live far, far below my means so that I can save up for things like traveling. I have also worked multiple jobs since I was 16 and saved much of that.</p>
<p>Oh and don’t ever say you feel sorry for me. I love my life. I love having the freedom to pick up and go to Central America now on almost a whim because I don’t know how long I’ll be here. That’s what spending a good chunk of your life in a hospital and watching both of your parents almost die very young will do to you. It will make you want to enjoy life while you still can.</p>
<p>My ambitions in life do not include buying fancy cars or houses. That’s not my dream. I have lived in 5 room houses (not bedrooms-total rooms) and McMansions and I prefer the tiny house. Again, my decision and I’d prefer not to be criticized for my tastes because they’re different than yours. As I said before, it doesn’t have to be spend OR save, it can be both to varying extents depending on the stage of life you’re in.</p>
<p>^^I agree with romani, but then again I usually do, she is very wise. </p>
<p>insomniatic, I appreciate your frugal take on spending, but you do not understand HELOC’s or 401K loans. They really are not the bogeyman, and they can be used wisely if you need them. Not a good idea to use them to enhance your lifestyle or go on a vacation, but for having peace of mind in case of a serious unplanned emergency, not just household repairs. My parents have very low expenses, but probably about 1 1/2 million in a 401K. Should they really cash a bunch of it out just to have a large wad of cash earning next to nothing (and 0.8% is next to nothing) to have that emergency fund? The peace of mind of having a large retirement fund and certainly a HELOC should you ever need it, is good enough for me. I hate debt, so we pay down everything before keeping money sitting in a bank account.</p>
<p>People are comfortable doing different things. Not everyone thinks alike. I think the richest I ever felt was when I was a brand new second lieutenant, earning 20K/year. No kids, no possessions, no debt. Beer was cheap, and I was too busy to spend money. Things sure change over the years, insidiously, but I know we could go back to pinching pennies if we had to. No particular reason to be uncomfortable just for the fun of it. Life is short. You can enjoy your income and save some too.</p>
<p>It’s a balance, that’s for sure. I know that we had nothing at all in savings by the time hubby and I had finished graduate school, and we had some debt from student loans and a car loan, and we had two young children. Why? Well, we were both working very low paid jobs and living frugally. If you don’t have money, that’s what happens! We did spend some on travel though, because experiences are important. We stayed in campgrounds and traveled by car, or flew and stayed with relatives. Life is short, and waiting for some experiences until you are 70 and can afford them…nah.
As it was, we had almost no savings when the kids were in college (less than 10k in a Roth Ira, but we are also both participants in defined benefit retirement systems.). They both went to a fabulous private university which has excellent financial aid. We ended up paying college costs out of pocket as we went, and kids graduated with no loans /loans under 8,000. Now that they have both graduated, we are aggressively paying off house and new cars. Still almost no cash in the bank in “savings”, but due to home equity, large lines of credit, short and long term disability insurance and defined benefit retirements, we are financially extremely healthy. I have too many friends who have been hard hit by serious health issues to avoid spending some of my money to enjoy adventures NOW. There may not be a later.</p>
<p>We didn’t save much until our early forties. By then our incomes had comfortably exceeded our fixed costs and we could focus hard on saving.</p>
<p>That said, my 22-year-old told his younger sibling to let him know if she needed money at college. I have no idea what he’s saved but the kid is a penny pincher.</p>
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<p>The problem is that every decision has an associated cost with it. In my case, I have an unsecured $15,000 line of credit. I have two options:</p>
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<li><p>Keep $15,000 cash in my local savings bank ready in case of emergency. Today, it is not earning interest.</p></li>
<li><p>Invest $15,000 in 2009, when the stock market was very low, with the belief that the stock market would rise in the future.</p></li>
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<p>Today, the $15,000 has turned into $22,500. So if I paid $70 in interest for my unsecured line of credit, then having that allowed me to invest and earn $7,500 on the same money. </p>
<p>There are two other ways a guy can look at it. One is they can observe that my bank (actually a credit union) pays about $70 a year in interest, so that year I broke even which still isn’t bad, and every other year I’ve made money from the bank which is great considering I have a low balance.</p>
<p>The other way a guy can look at it is the vehicle that I bought cost me about $7,000 out of pocket after license, taxes, etc. So I think the $70 in interest was negible compared to the overall cost.</p>
<p>The problem with lines of credit is they can get misused. I don’t misuse mine. I have used it once for a short term (3 month loan) to buy a replacement vehicle after mine was totalled, and that was a genuine correct use of an emergency.</p>
<p>OP - congratulations. You sound like you are definitely an accumulator of wealth. Building up a several month cash reserve is the first step recommended by any compentent financial planner and everyone should strive to achieve this goal.</p>
<p>However, one day given that you are “wired to save” as opposed to overspend, you may well be the client of a Private Bank. One of the first things your new fancy banker will do, is set up a line of credit for you - for reasons described by Engineer. The world is full of great investment opportunities and there is an “opportunity cost” for keeping excessive amounts of money in cash. And you don’t have to be in rarified air of a private bank to take advantage of this strategy.</p>
<p>Your line can be secured by a mortage, or second mortgage on your home (Home Equity Line of Credit - HELOC) or an unsecured line of credit- at a much higher interest rate. Today in the Chicago market, HELOC rates are below 4% with no closing costs and maybe a $50 annual fee - if you have enough money with your bank this might be waived too. Since HELOC interest can be tax deductible (there are some limits) you are really borrowing at an effective rate of about 2.8% or less depending on your exact tax bracket. There are numerous blue chip investments that have dividend yields alone of more than 2.8%. The assumption is that instead of stockpiling cash, you take that cash and make solid investments that, if necessary, could be sold to repay the line of credit. In addition, capital gains and dividend income are taxed at much lower rates than wages or interest income - think Mitt.</p>
<p>But Engineer is correct - credit lines can be abused. A credit line is like a knife - it is neither intrinsically good or evil. A knife in the hands of skilled surgeon is an instrument for healing and good, in the hands of mad-man, it is an instrument of evil and death. The same goes for credit lines.</p>
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<p>Aw shucks, thanks bd. <em>blushes</em> lol</p>
<p>Oh sure, you know that’s true, romani! I only hope your boyfriend realizes it too.</p>
<p>“I have too many friends who have been hard hit by serious health issues to avoid spending some of my money to enjoy adventures NOW. There may not be a later.”</p>
<p>It is very sad to see people who get serious illnesses that affect their mobility, and their dreams of seeing the world going down the tube. It can happen sooner than you think. Or as they get older, they become fearful to travel, especially by themselves.</p>
<p>Diet + Exercise = health savings account</p>
<p>D1 who is 21 has about $10K in her savings but that came from $20K savings. So the savings rate is negative.
I never saved in my 20’s and early 30s either. But I did manage to buy a house and put money into my 401K. Nothing more.
I saved a little more in my 40s and 50s . Now, I think I have more money for my retirement needs and college funds. I wouldn’t worry too much.</p>
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<p>Bingo. This is the problem with people in this thread who don’t save for a rainy day and this is why this country has over a trillion in credit card debt.</p>
<p>A lot of people live in a world of “buy now, pay later” (as evidenced by some people in this thread). Why save in my 20’s and 30’s when I can blow all of my money?</p>
<p>It’s very, very scary to read some of the responses on here and how little people save.</p>
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<p>And it’s also very scary for a 24 year old to come on here and tell everybody else how to live without knowing their individual details that have led them down the paths they lead…</p>