Can non-cash investments be liquidated to provide short term cash if needed?
Here are some interesting questions to consider:
- What would the tax consequences be, if any?
- How long would it take to have access to the liquidation proceeds?
- Do you have enough cash or credit on hand to wait until the liquidation proceeds are availalbe?
- If you could identify which assets would be liquidated, would you have enough given their expected level of volatility; i.e. some asset classes can lose as little as 7% in a given period while others can lose as much as 44%. If you lost 44%, would you still have enough assets to sell?
Once assets are sold would you rebalance your other assets immediately or wait until the emergency funds are paid back?
If you had an emergency and relied on credit, would you need the funds as cash - if so how would you convert the credit to cash?
If you don't have a line of credit - what would be an alternative?
Would investment returns exceed the higher interest rates from a
With these thoughts in mind, a few interesting things appear:
- It may make sense to maintain a home equity line of credit (LOC) for emergencies - assuming you can put off dipping into it for convenience / non-emergencies.
- With an LOC, you can reduce your cash reserves and put them in more profitable long term investments
- A spending plan should be in place to differentiate cash accrued for short-term expenditures (this year) versus actual emergencies (job loss, etc...)
- An emergency cash plan should be put in place. It should show how much cash could be made available within 1..14 days. Each day showing the source and the actions needed to get it.
- The emergency cash plan should be reviewed and updated when investments change, lines of credits change and annually to review utilization of emergency funds - you need to audit the usage to determine if you're really using the funds for emergency purposes.
I admit, this approach is fairly bold. I'm going to sell my house before mid-2007 so opening a new LOC may not work for me.
What other sources of credit do I have? Credit cards - but how do I turn that into cash? Margin accounts on investments - might be a convenient way to go - will have to see what happens after we relocate investments.