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Old 08-06-2019, 01:23 PM
filmore is offline
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Are there "emergency" savings accounts that only allow you to borrow money from it (e.g 401k loan)?


I was thinking a good way to have an emergency-only savings account is to have one which you could only borrow from and have to pay back as a loan. A similar kind of thing is a 401k account. This retirement savings account offered as an employee business sometimes allows you to take some money out as a loan, but you have to pay it back with interest. Are there any regular kinds of saving vehicles which could be used in the same way? Some sort of savings account where you can't easily get money out, but you could take a loan out if you needed some of the money short term and would have to pay it back? Essentially, it's like your own payday loan account where you are lending money to yourself.

Last edited by filmore; 08-06-2019 at 01:28 PM.
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Old 08-06-2019, 01:25 PM
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I think this sort of thing would be good for kids just starting out on their own. It would be a way for them to have access to cash for emergencies (e.g. car repair), but the money wouldn't be just sitting there to be used for a vacation or whatever.

Last edited by filmore; 08-06-2019 at 01:30 PM. Reason: Accidentally hit post instead of preview when I created the thread
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Old 08-06-2019, 02:16 PM
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You can borrow against a certificate of deposit, which is the closest I can think of to what you're asking.
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Old 08-06-2019, 02:21 PM
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Can't you just do this on your own? Take $5k out of your savings account, make up an amortization table in Excel with your preferred interest rate and repayment terms and make monthly contributions back into your savings account.
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Old 08-06-2019, 02:34 PM
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Can't you just do this on your own? Take $5k out of your savings account, make up an amortization table in Excel with your preferred interest rate and repayment terms and make monthly contributions back into your savings account.
Yes, absolutely. A financially disciplined and responsible person would likely never need such a savings account. However, for someone who is just starting out, not good with money, impulsive, etc., having a limited use savings account could help them be financially stable. They would have a fund they could tap if needed, but there would be restrictions such that it would be harder to blow through the money on frivolous things. Of course, a totally irresponsible person will find a way to blow through the money--consequences be damned--but it might be good for the more responsible people.

I didn't realize you could get a CD-backed loan. That could be a good option. For example, a kid just starting out could get advice to never carry credit card debt and live within their means. But if an unexpected expense came up, they could get such a loan. That way they aren't tempted to start carrying balances on their CC. The parents could start the kid out with $XX in a long-term CD. They could also tell their kid put money in both regular savings in cash and some in CDs, but the loan would allow them to access the CD-locked money in an emergency.
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Old 08-06-2019, 03:02 PM
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A parent could do the same thing, with an account that requires both signatures (parent and child) to withdraw funds.

To get very technical and overly complicated, a trust could be created that does the same thing with specific parameters.
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Old 08-06-2019, 03:38 PM
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Yes, absolutely. A financially disciplined and responsible person would likely never need such a savings account.

On the other hand, how do you think one becomes such a person? By screwing up and learning the hard way. Heck, you don't even really need to screw up to learn some of these lessons the hard way.

The hard part of what you are proposing is actually saving up the funds in the first place. Once you do that, spending it is just a choice one makes and having done the hard part of saving it should temper irresponsible spending. Financial screw ups are not likely to get to this decision point, they bypass it directly by using credit cards. So financially responsible people don't need what you are proposing, and irresponsible people never reach the point where they could use it.
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Old 08-06-2019, 03:54 PM
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What you are describing exists, except that borrowing money is not classified under "savings".

Example:

"Personal line of credit" by Wells-Fargo. It furthermore explicitly says that if you have a CD or savings account, you may use that as collateral.

UBS calls it a Credit Line, "secured by a pledge of one or more of your eligible investment accounts".
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Old 08-06-2019, 04:40 PM
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On the other hand, how do you think one becomes such a person? By screwing up and learning the hard way. Heck, you don't even really need to screw up to learn some of these lessons the hard way.

The hard part of what you are proposing is actually saving up the funds in the first place. Once you do that, spending it is just a choice one makes and having done the hard part of saving it should temper irresponsible spending. Financial screw ups are not likely to get to this decision point, they bypass it directly by using credit cards. So financially responsible people don't need what you are proposing, and irresponsible people never reach the point where they could use it.
If the consequences of messing up weren't so disastrous, I'd probably be okay with letting a kid learn on their own. But when a sudden expense goes on a CC, then interest and fees start adding up, then paying one CC from another, and so on, pretty soon the person has trashed their credit. Then it's that much tougher to rent an apartment, get a decent loan, mortgage, etc. It's an effective learning experience, but it's also a downward spiral that can be tough to reverse.

I think a lot of the things mentioned here are great tools to get kids started on the right path with money management. Give them a safe way to have an emergency funds for those times when expenses come up.

I remember when I was just starting out, I didn't put money in CDs because I was always worried about needing the money for an unexpected expense. As a novice (and even now), I didn't realize you could get a loan against your CD. Back then I kept money in savings, which meant it was also sitting there easily to be dipped into. If I knew I could have had money in CDs but still been able to get a loan, I would likely have saved more and avoided some problems early on.
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Old 08-06-2019, 05:43 PM
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Savings accounts are not really intended to have money come out of them often, thus there are penalties for >6 debits in a month. Personal loan or HELOC, if you want to use credit, or a CD if you want to earn interest. Or money market, but that's mostly a savings account by another name.

Last edited by thelurkinghorror; 08-06-2019 at 05:44 PM.
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Old 08-07-2019, 03:04 PM
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Not exactly an emergency loan plan, but: In Canada, you can "borrow" up to $35 000 from your retirement savings to purchase a home. (Scare quotes because, well, it's your money in the first place.) Note that you don't have to pay back any interest, you just have to reimburse the amount that's missing from your RRSP account over 15 years. Link to Home Buyers' Plan here.
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Old 08-07-2019, 03:15 PM
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Originally Posted by DPRK View Post
What you are describing exists, except that borrowing money is not classified under "savings".

Example:

"Personal line of credit" by Wells-Fargo. It furthermore explicitly says that if you have a CD or savings account, you may use that as collateral.

UBS calls it a Credit Line, "secured by a pledge of one or more of your eligible investment accounts".
Anyone know what happens to the LoC when the CD being used for collateral matures before the LoC is paid off? Does the bank hold onto the money from the CD? Do they call in the LoC loan?
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Old 08-07-2019, 04:17 PM
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Originally Posted by filmore View Post
Anyone know what happens to the LoC when the CD being used for collateral matures before the LoC is paid off? Does the bank hold onto the money from the CD? Do they call in the LoC loan?
Wells-Fargo says, "Please note the amount in your collateral account equal to the full amount of the line of credit will not be available for use until the CD/Savings Secured (Portfolio) Line of Credit is paid in full and closed." So they indeed hold on to the money.

The UBS link says, "If the required collateral value is not maintained, UBS Bank USA can require you to post additional collateral, repay part or all of your loan, and/or sell your securities. Failure to promptly meet a request for additional collateral or repayment or other circumstances (e.g., a rapidly declining market) could cause UBS Bank USA to liquidate some or all of the collateral supporting the Premier Fixed Credit Line." So, similar: you may not put an account up as collateral for this type of line of credit, tap that credit, and withdraw the original collateral to boot.

Last edited by DPRK; 08-07-2019 at 04:20 PM.
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Old 08-07-2019, 04:41 PM
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A single-premium whole life insurance policy can be borrowed against, and would be a decent solution for this.
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Old 08-07-2019, 05:24 PM
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Quote:
Originally Posted by xnylder View Post
Not exactly an emergency loan plan, but: In Canada, you can "borrow" up to $35 000 from your retirement savings to purchase a home. (Scare quotes because, well, it's your money in the first place.) Note that you don't have to pay back any interest, you just have to reimburse the amount that's missing from your RRSP account over 15 years. Link to Home Buyers' Plan here.
You can take out $10,000 in the US for the same purpose, though it's not a loan and you don't need to pay it back, you just avoid the penalties for early withdrawal. Roth IRAs can be used the same way but the principal is already tax and penalty free and the interest can be if held long enough.

Whether you can borrow depends on the type (e.g. 401k ok, IRA not) and if your employer allows it.

In Canada, how is the payback done? If you put money into the account, can you decide to earmark it for payback OR new funds? Or can you not start accruing retirement until that is paid? Edit: looked through the link, sounds like it's a mandatory $2333.33 per year if you take the maximum, but you can always pay it early.

Last edited by thelurkinghorror; 08-07-2019 at 05:25 PM.
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Old 08-07-2019, 05:35 PM
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When borrowing from a 401k account, many people misconstrue what the true cost of the loan is.

Sure your employer may set the repayment schedule, subject to federal regulations, and the notional interest rate (say 4-5%), that you the individual may pay back over a 4 year period. You the individual may say that it's only a 4% interest that I'm paying back to myself, but in reality in most situations, the real interest cost of the loan is significantly greater.

It is actually the lost earnings that you are missing out on, while those funds are not in your investment account. If during the 4 year period that $10,000 you borrowed, could have been earning 15% per year invested in an index fund, that's the true cost of your borrowing, not the 4%.
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Old 08-07-2019, 06:07 PM
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When borrowing from a 401k account, many people misconstrue what the true cost of the loan is.

Sure your employer may set the repayment schedule, subject to federal regulations, and the notional interest rate (say 4-5%), that you the individual may pay back over a 4 year period. You the individual may say that it's only a 4% interest that I'm paying back to myself, but in reality in most situations, the real interest cost of the loan is significantly greater.

It is actually the lost earnings that you are missing out on, while those funds are not in your investment account. If during the 4 year period that $10,000 you borrowed, could have been earning 15% per year invested in an index fund, that's the true cost of your borrowing, not the 4%.
Yes, but it sure beats just withdrawing the money and taking the tax hit for your tax bracket plus 10% penalty (or 12.5% in California).
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Old 08-07-2019, 06:57 PM
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Yes, but it sure beats just withdrawing the money and taking the tax hit for your tax bracket plus 10% penalty (or 12.5% in California).
Or get a home equity loan that is significantly cheaper.
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Old 08-07-2019, 08:09 PM
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If you're not looking for much, a checking account with overdraft protection might be what you need. Years ago I had a checking account that would allow me to go $300 into the red with no consequences other than a little bit of interest on it.
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Old 08-07-2019, 10:14 PM
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You can take out $10,000 in the US for the same purpose, though it's not a loan and you don't need to pay it back, you just avoid the penalties for early withdrawal. Roth IRAs can be used the same way but the principal is already tax and penalty free and the interest can be if held long enough.

Whether you can borrow depends on the type (e.g. 401k ok, IRA not) and if your employer allows it.

In Canada, how is the payback done? If you put money into the account, can you decide to earmark it for payback OR new funds? Or can you not start accruing retirement until that is paid? Edit: looked through the link, sounds like it's a mandatory $2333.33 per year if you take the maximum, but you can always pay it early.
You got it. Basically, you earmark what you want to go towards paying off the loan when you file your income taxes. Like you found, there's a minimum amount each year, but you can pay back more. So for example, if you contributed $5000 into your RRSPs one year, on your income tax return you'd specify that $2333.33 (or any amount up to $5000) was going towards your Home Buyers' Plan.

Last edited by xnylder; 08-07-2019 at 10:14 PM.
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Old 08-14-2019, 12:40 AM
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...
I didn't realize you could get a CD-backed loan. That could be a good option. For example, a kid just starting out could get advice to never carry credit card debt and live within their means. But if an unexpected expense came up, they could get such a loan. That way they aren't tempted to start carrying balances on their CC. The parents could start the kid out with $XX in a long-term CD. They could also tell their kid put money in both regular savings in cash and some in CDs, but the loan would allow them to access the CD-locked money in an emergency.
We did just that some years back. We had the cash for the purchase in question (it was a computer, IIRC), but we were concerned we wouldn't be disciplined enough to pay it all back to ourselves. So we took out a loan secured by the CD - and a year later, we had the computer AND our 2000 bucks.
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Old 08-14-2019, 12:44 AM
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Not exactly an emergency loan plan, but: In Canada, you can "borrow" up to $35 000 from your retirement savings to purchase a home. (Scare quotes because, well, it's your money in the first place.) Note that you don't have to pay back any interest, you just have to reimburse the amount that's missing from your RRSP account over 15 years. Link to Home Buyers' Plan here.
There's something similar in the US, though only against a 401(k) or similar (a workplace savings plan). You can NOT borrow against an IRA (an individual account). The payback rules are strict; I think 10 years if you are using it for a home, 4 if you are using it for any other purpose.

And if you leave that job, you may have to come up with the outstanding balance very quickly, or it gets treated as an early disbursement with all the penalties that entails. We took out such a loan some years back when the mortgage fell through on the condo we were purchasing for my in-laws; I had to raise tens of thousands of dollars in a very short timeframe. Paying that back sucked - as it did not qualify as a loan for a primary residence.
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Old 08-14-2019, 08:48 AM
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Loans backed by deposits, CDs and other guarantees are available from your bank at decent rates because, well, they are secured....and you are encouraged to pay back because they hit your credit report (the good or the bad). This provides extra incentives to pay, and it comes with risk if you don't.

If you don't pay back a 401k loan, because you lose your job and ability to pay back into it, you collect your 401k for transfer to another 401k (or whatever) and the outstanding principle is deducted before transfer or payout.
.
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Old 08-14-2019, 07:14 PM
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...
If you don't pay back a 401k loan, because you lose your job and ability to pay back into it, you collect your 401k for transfer to another 401k (or whatever) and the outstanding principle is deducted before transfer or payout.
.
Not just that, but you'll owe hefty taxes and penalties on the part that hasn't been repaid.

Also when you leave a job, usually you do NOT have to roll over your 401(k).
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Old 08-15-2019, 02:56 PM
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Not just that, but you'll owe hefty taxes and penalties on the part that hasn't been repaid.

Also when you leave a job, usually you do NOT have to roll over your 401(k).
Right, that's the 'whatever' part... but they deduct the outstanding balance from the 401k if you don't pay. Typically, the payment ends when the job ends.
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Old 08-16-2019, 03:23 AM
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However, for someone who is just starting out, not good with money, impulsive, etc., having a limited use savings account could help them be financially stable.
Seems they have a bigger issue to solve if that's the case. When I was young, I was not impulsive on spending, and I was good with money. They need to learn to manage it, because it is something you are going to have to do your entire life.
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Old 08-16-2019, 05:37 PM
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It is actually the lost earnings that you are missing out on, while those funds are not in your investment account. If during the 4 year period that $10,000 you borrowed, could have been earning 15% per year invested in an index fund, that's the true cost of your borrowing, not the 4%.
This is true, but borrowing from a 401(k) is still better than most other forms of borrowing.

If instead you borrowed from a bank and kept the money in your 401(k), then you'd be paying interest to the bank (instead of yourself) and you'd be more highly leveraged, and you'd have to put up something as collateral, which you risk losing.

If you think it's a good idea to borrow money and invest it, you can do that whether or not you need to take a loan. But leverage is risky.

Suggesting that you can make 15% invested in an index fund is obvious cherry picking. You can also lose money, and average returns are nowhere near 15% annual.
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Old 08-16-2019, 08:35 PM
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....
It is actually the lost earnings that you are missing out on, while those funds are not in your investment account. If during the 4 year period that $10,000 you borrowed, could have been earning 15% per year invested in an index fund, that's the true cost of your borrowing, not the 4%.
It's actually worse than that.

I believe that most people, when they take out such a loan, reduce or stop new contributions while they are paying things back - because they need that cash flow to make the payments.

So if you're saving 6,000 a year - and you take out a loan that requires payments of 500 a month, you would have to continue paying the 500 a month for the loan, AND another 500 a month to continue your contributions at the previous rate.

So if you have 100,000 in the account now, and you borrow 24,000, you have 76,000. In 4 years, after you pay back the 24,000 (ignoring interest for simplicity), you have 100,000 assuming you weren't able to keep making the contributions as well..

If you had NOT taken the loan, you'd have 100,000 now, plus 24,000 additional contributions, or 124,000. Or more, since you're also losing out on employer contributions.

When we had to take a 401(k) loan a few years back, I cut my contributions due to cash flow reasons, though I managed to keep them at the 6% to get the employer matching.

Last edited by Mama Zappa; 08-16-2019 at 08:38 PM.
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