In this episode of ThimbleberryU, we dive into a critical financial planning misconception: using a HELOC (home equity line of credit) as a cash reserve. This approach can increase financial risk and reduce flexibility, and we offer smarter alternatives for financial security.

Amy begins by explaining what a HELOC is—a line of credit secured by the equity in your home that operates much like a credit card, but with a variable interest rate and lender-imposed limitations. Unlike cash in the bank, which is liquid and entirely within your control, a HELOC is borrowed money subject to lender discretion. Amy recalls the 2008 financial crisis when many lenders reduced or froze HELOCs due to economic downturns. If a HELOC were someone's sole cash reserve, they might find themselves without access to funds when they need them most.

There's also the unpredictable nature of HELOCs. Factors like interest rate variability, declining home values, or personal credit score changes can make repayment more expensive or render the HELOC inaccessible. Relying on this type of borrowing creates new debt, adds to monthly financial burdens, and can even endanger your home if you're unable to make payments.

Amy emphasizes the importance of building a liquid cash reserve as the cornerstone of financial planning. She advises saving three to six months' worth of living expenses in a savings or money market account. This cash reserve acts as a financial "life jacket," offering immediate access to funds during emergencies without incurring debt or lender restrictions.

While a HELOC should not serve as a cash reserve, Amy acknowledges it can have a place in a financial plan. For example, it can be a useful tool for home improvement projects, provided it is used strategically and repaid responsibly. A cash reserve is like a life jacket and a HELOC is like a paddle—both valuable, but with distinct purposes.

You should approach emergency funds with a clear purpose. Start small, save consistently, and remember that a solid cash reserve is the foundation of financial stability. A HELOC, while useful in certain scenarios, is not a replacement for cash.

To get in touch with Amy and her team at Thimbleberry Financial, call 503-610-6510 or visit thimbleberryfinancial.com.