Here I am, seven years in to my personal finance journey, realizing my relatively disciplined approach to our finances has caused us financial harm.
Allow me to share with you one of the most recent examples of how “doing the right thing” came to bite us in the butt:
In 2010 Girl Ninja and I decided we wanted to buy a house one day. We knew said house would probably cost us around $400,000. We knew amassing a 20% down payment was the financially responsible thing to do.
So we did exactly that.
We spent three and a half years throwing tens of thousands of dollars in to our savings account (late 2010 to early 2014). In hindsight this was absolutely the wrong financial move for a few reasons.
1. Instead of banking nearly all of my discretionary income. I could have saved half and invested half. My savings account was only earning me 1%, meanwhile the stock market during this same time increased by 60%.
2. Because we were adamant on waiting to buy a house until we reached the $100,000 savings threshold, we missed the bottom of the real estate market. Had we bought 1.5 years earlier, when we had about $60,000 in the bank, we still could have put down 15%, but saved probably $30,000 on the purchase price of our home.
3. And just like we missed the bottom of the housing market as we tried to hoard cash, we also missed the bottom in regards to mortgage interest rates. We locked at 4.125%. Had we bought a year earlier, our rate would probably be about 3.4%, saving us $120/month… every month …for thirty years.
So yeah, I thought I was smart by waiting to have $100,000 banked to buy a home, but that clearly wasn’t in my best financial interest.
Now I know you might be thinking to yourself “Ninja, hindsight is always 20/20.”
But my foresight was also 20/20.
In 2010 I was saying the crappy market didn’t scare me because I knew over the long run it goes up.
Pretty much everyone knew by 2012 the real estate market had probably bottomed and was on its way up. Here’s a blurb from one of my late 2011 articles
The housing market bubble burst in 2007/2008. It dropped hard and fast for a long, long time. Over the last 12 months, however, it’s remained pretty steady and in my opinion is probably pretty close to a bottom (if not already there).
We knew that a 3.4% interest rate was the lowest in history.
I mean it’s like the real estate gods had aligned the stars perfectly telling anyone with a stable career and a decent income “BUY A FREAKIN’ HOUSE NOW!!!!”
I wish I listened.
Never again friends. Never again.
It’s time I start taking calculated risks in an effort to further improve my financial situation.
In the next week or so Girl Ninja and I plan to head to a local credit union and apply for a Home Equity Line of Credit (HELOC).
“BUT NINJA YOU ARE SUPPOSED TO HATE DEBT! Why would you consider taking out a line of credit” – You guys.
Diversification my friends.
I’m sick of my cash earning 1% in our savings account. The time has come to seek higher returns.
Our new plan is as follows:
…Keep no more than $10,000 in our savings account (this is about 3 months of expenses at current spending levels).
…Move all remaining savings in to my taxable investment account where I will increase my market exposure.
…Open up a HELOC as a secondary emergency fund. Gaining access to about $50,000 if needed.
You might be wondering why I’ve decided to use the HELOC as a back-up emergency fund instead of my Roth IRA, or even a 401K loan.
Again, the answer is diversification.
Let’s pretend I have a $20,000 emergency. My roof caves in. Or maybe that Unicorn I’ve always wanted to buy comes up for sale. Or maybe Girl Ninja is kidnapped by some Canadians and a $20,000 ransom is requested.
I can cover half of this emergency by liquidating my $10,000 e-fund. I could pull another $10,000 from my Roth IRA, or taxable investment account, without penalty. Or I could borrow $10,000 from my 401k at 2.25% interest.
But what if the stock market has been having a really crappy go at it? Say the Dow is down 25% on the year like it has been in the past.
You think I’m going to want to sell these stocks and lock in a 25% loss?
This is where my HELOC could actually be a blessing. It allows me to mitigate potential crashes in the stock market. I’d simply transfer $10,000 from my HELOC to my checking account. I’d rather pay 4% on this loan, over 25% in market losses any day.
“But Ninja, what if the markets are up 25% like they were in 2013.” – You guys.
Well then I borrow the remaining $10,000 from my taxable investment account and lock in that sexy appreciation.
Just because we will be opening a line of credit doesn’t mean I have to use it. Just like you don’t have to use that credit card sitting in your wallet.
Opening up a HELOC, and diversifying my cash flow options, seems like a no brainer. I’m super pumped to finally be at a place where Girl Ninja and I can decrease our cash reserves, and ramp up our investment portfolio.
Now quit wasting time and go get yourself a HELOC. <—joking
What do you think of my plan? (bring it on haters)
What do you think about HELOC’s in general?
Have you reached a point, like me, where you’ve realized that your conservative nature has cost you big bucks?