Borrowing from myself

Some of you may think I’m crazy to borrow from my emergency reserves and to sell some of my taxable investments. I haven’t had an emergency where I needed to touch my emergency reserves other than business trips in several years. I far prefer the idea of borrowing from my emergency reserves than taking out a 401(k) loan since I am borrowing from myself instead of paying 4.25% in interest.

I have set a limit as to how far I am wiling to lower my emergency reserves ($6,000 or approximately 2 months expenses at my current spending level) and I have a plan to pay myself back.

Since I’m not sure if I will be able to Roth IRA or not, I’m going to use all bonus and regular income in the first two quarters of 2012 to pay myself back. I should know with the amount of my 3rd quarter bonus if I can Roth IRA or not. If I can Roth IRA, my repayment schedule will look like this:

  • 1st and 2nd quarter bonuses: self re-payment
  • 3rd quarter bonus: max out Roth IRA and re-pay self with rest
  • 4th quarter bonus: self re-payment
  • Savings room in monthly cash flow (approximately $600): self re-payment

I currently estimate that it will take until somewhere between October and December of 2012 to fully re-pay myself and build my emergency reserves up to 6 months of expenses at the new level.

I plan to re-pay myself in the following order:

  1. Taxable investments that I borrowed
  2. Build emergency reserves up to 6 months of expenses at the new level
  3. Car replacement funds that I borrowed

Any money that I can save between now and closing is money that will reduce the time it takes to re-pay myself.