Leverage to Invest Emergency Funds
Leverage is SCARY
I know, I know, leverage is very, very scary and is very, very bad for you. If you are horrible with money, don’t read this article. It’s not meant for you. Ok, let me just share how I use leverage in an objective manner, to show how it has worked for me.
Emergency Funds
Everybody should keep emergency funds, whether it’s 6 months, 12 months, 60 months or whatever number works for you. For me, as an individual person, my number is S$50k. And as you probably already know, leaving S$50k in cash is probably not going to attract much interest. I am getting about 2 to 2.5% per annum, nothing to shout about really. I am most certainly losing money via inflation. I can consider it as a business cost, or an opportunity cost. Regardless, there should be an amount set aside. Again, if you are living paycheck to paycheck, this article is not meant for you. Stop reading.
Business/Opportunity Cost
Let’s say you have a business and you are generating 20% per annum. Or let’s say you have been investing in whatever and you are generating 20% per annum easily. Would it make sense to keep your emergency funds as cash attracting 2% per annum? I don’t think so. So how did I “unlock” my emergency funds?
Sensible Leverage
For me, if I can get leverage for my S$50k cash, I would be able to have both my emergency funds and the ability to invest it. So I do “Balance Transfer” aka BT. Essentially, I use BT to leverage on my emergency funds so that I can use it and I pay a small fee for this freedom. Usually the fee is about 2% effective interest rate per annum. So the gains to cost ratio is 10x and I think that is reasonable amount for the extra work that needs to be done. There is a requirement to pay a small amount every month and to finish paying up the BT in 6 months. So I have a process for this.
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BT Process
- Take S$16k BT from Bank 1 and invest S$16k, I still have S$50k in my bank.
- Wait 2 months and take S$16k BT from Bank 2 and invest S$16k, I still have S$50k in my bank.
- Wait 2 months and take S$16k BT from Bank 3 and invest S$16k, I still have S$50k in my bank.
- Wait 2 months and repay Bank 1 fully, I have S$34k in my bank. Wait a few days, and take S$16k BT from Bank 1 again, I still have S$50k in my bank.
- Repeat the same with Bank 2, and 3, and so on.
So at any point in time I have S$50k in my bank except for a few days it will dip to S$34k. And I will also have S$48k invested throughout and I do not need to liquidate my investments to pay off the BT. So assuming my investments give me 20% per annum (it’s higher but let’s just say it’s 20%), I will generate an extra S$9k per annum using sensible leverage on my emergency funds. This works for me and I enjoy the process. If you think this is a hassle, this article is not meant for you.
Relevant Links
A day in my Investment Journey: https://medium.com/@singaporeanlandlord/a-day-in-my-investment-journey-c37012e1c38b
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