Ok, so here’s another attempt at a discussion…? feel free to comment below or do your own post as a trackback to this one.

Almost all financial plans promote the concept of building a pool of “safe money” to cover emergencies and unexpected expenses.? This is certainly a good idea, though to think about it critically, we need to look at the real requirement behind the idea.? The idea isn’t just to have cash in a bank account, the point is to have immediate access to funds if/when you have unexpected situations crop up.

The traditional place for safe money would be a savings account or money market account.? Keeping this pool of money in such a safe place gives you many benefits — almost instant access, near zero chance of loss, etc.? You also have the benefit of knowing exactly how much you have available — maybe enough to cover expenses for 3 or 6 months were you to lose your job/income.

In many respects, you can consider your lines of credit (credit cards, home equity loans, etc.)? as part of your cash reserve.? You have nearly instant access to it — in some cases even quicker than getting money out of a money market account.? You have a near zero chance of losing the credit line — unless you sell your house (for HEL) or close your credit card account.? You also know how much you have available in the form of your credit limit (and your credit score can actually benefit from having a lot of unused credit available).? You can also potentially build a larger pool of safe money if you have good credit — in effect having a credit line that exceeds the same amount you can/would keep in cash.

So, allow me to posit a question — is there a real difference in keeping safe money in cash versus keeping the same amount in available credit?? Some obvious caveats apply — if you aren’t paying off your credit card bill every month or if you have problems overspending with credit, you shouldn’t consider this a choice: keep safe money in cash.

One argument for keeping your safe money pile in cash is that it allows you to use the cash, and then follow with the credit in case emergencies happen in a wave.? In that respect, you have effectively pooled your lines of credit and cash into a larger pool of safe money…? Likewise, some expenses (new car, expected home maintenance, etc.) can be anticipated and shouldn’t be included in this discussion.

Let’s consider two hypothetical examples for entertainment’s sake…

Case 1 – Someone with little to no debt and active investments.? If he were to choose the credit route for his safety pool, he would deploy the extra cash in his brokerage account and put it at risk in investments.? If he had unexpected need for funds he would use his credit.? After the credit spike, he might decide to sell some of his investments to offset the credit (depending on the business case analysis, tax considerations, etc.) or simply pay off the credit over time from his paychecks.? Multiple emergencies that exceeded credit limits would force liquidation of some assets to bridge the gap.

Case 2 – Someone with debt and a debt-reduction plan in place.? If he were to choose the credit route for his safety pool, he would deploy the extra cash to lower his outstanding debt and speed up his debt reduction.? Unexpected funds would cause the credit to increase again, but in this case he’s back where he started (more or less).? A side benefit is that the credit terms might get better during the lower debt periods.

What do you guys think?? Is the psychology of debt too powerful to pull this off successfully?? Does having money in cash let you sleep better at night?