What's the Best Way to Save for Emergencies?
By Asa Fitch

(MONEY Magazine) – Q. Is it better to use spare cash to build up an emergency fund or put that money toward paying down a home-equity line of credit and then use the HELOC as an emergency fund? --Jonathan Darab, West Bloomfield, Mich.

A. It can't hurt to put a small portion of your free cash into an emergency fund if it gets you in the habit of saving. But you'll end up with more money in your pocket if you pay down the HELOC first, says Dallas financial planner Matt Paladini. Do the math: The best you can expect to earn in a money-market fund is about 5%, while you're probably paying 8.25% to 10.25% on the line of credit. True, you can deduct the interest on up to $100,000 in HELOC debt. But the deduction still won't lower your effective interest rate enough to make the money fund the better deal. Once you're debt-free, you can start building your emergency fund in earnest (and yes, the HELOC can serve that purpose in the meantime). Just keep your hands off it unless you face a real crisis--emergency trips to the Bahamas don't count.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.