Smart Borrower Center
Tools to help you borrow better
A: The rule of thumb is that you need an emergency fund large enough to cover your living expenses for at least three months, in case of a major illness, a job loss, furnace breakdown or some other crisis that either interrupts your earnings or requires a large outlay of cash. To calculate this amount, you'll need to do a budget that shows how much you spend on food, housing, transportation, utilities, medical and dental care, drugs, insurance premiums and other fixed expenses each month.
But you don't have to keep that much cash on hand. You can use a credit card with a low interest rate, a personal loan or a line of credit as an emergency fund, as long as the borrowing limit is high enough to cover your needs for approximately three months.
If you own your own home, you may qualify for a home equity line of credit. Home equity lines are a particularly good source of emergency funding. Because they are secured by the equity in your home, the interest rate is typically lower than for credit cards and personal loans - and the interest you pay is usually tax deductible. Further, you only pay interest on the money you spend.
The amount you can borrow varies from one lender to another, but is usually calculated as a percentage of the paid-up value of your home (the difference between the current market value and your current mortgage balance).
The borrowing and repayment terms also vary from lender to lender. The lender may stipulate a minimum amount that you must borrow whenever you draw on your line of credit, for example, or a minimum monthly payment on any balance outstanding. For emergency funding purposes, it's best to get a home equity line that is flexible in terms of the amount you can borrow and when you must pay it off.
Published on February 01, 2007