'We have about $1.7 million invested but only around $20,000 in cash'

"My husband would prefer to sell some mutual funds, take the resulting tax hit, and replenish our cash reserves that way." (Photo subjects are models.)

Dear Quentin,

I'm 57 and my husband is 61. We're both semi-retired and currently working part time. Over the past three years, we've depleted a significant portion of our cash reserves due to a new roof, various home repairs, two used cars and some unexpected veterinary bills.

We generally try to maintain positive cash flow, but we've had a lot of expenses hit in a relatively short period of time. We currently have about $1.7 million invested but only around $20,000 in cash. Ideally, we'd like to rebuild our emergency reserves to around $100,000.

My question is whether it would make sense to use a HELOC as a temporary bridge while we rebuild our cash reserves, rather than selling investments. We're trying to avoid withdrawing $100,000 from our portfolio if there's a reasonable alternative.

My husband would prefer to sell some mutual funds, take the resulting tax hit, and replenish our cash reserves that way. I'd rather avoid realizing capital gains if we can reasonably use a HELOC temporarily instead.

My husband and I are at odds over this. For any of your readers who may have been in a similar situation to us, would you consider using a HELOC as a short-term bridge, or would you bite the bullet and sell the investments to restore the cash reserve?

Facing Unexpected Costs

Selling investments or taking out a HELOC - secured debt - to build up your emergency fund is the financial equivalent of the tail wagging the dog.

Related: My wife and I are both retired': Do we dip into our $2.3 million fund to pay off our $300,000 mortgage at 2.9%?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

Dear Facing,

You are both barking up the wrong tree.

Selling investments or taking out a HELOC - secured debt - to build up your emergency fund is the financial equivalent of the tail wagging the dog. It should be the other way around: Your emergency fund should be paying off the HELOC.

After all, an emergency fund exists to prevent you from having to make a harsh decision at an inconvenient time. It's depleted after paying for all of these expenses, but that's why it's there - to be depleted in a time of need.

You have three options: Take money from your retirement, take out a HELOC, or (my favorite) slowly build up your emergency fund the old-fashioned way, by siphoning money from your income and cutting your expenses.

If you took $100,000 out of investments and they earned an average 7% annually for 20 years, the opportunity cost would be significant. In fact, it would cost you nearly $390,000 over 20 years. You are swapping stock-market returns for inflation.

You are swapping stock-market returns for inflation.

If the $100,000 withdrawal triggered capital-gains tax, you would likely need to sell more than $100,000. For example, if taxes effectively cost you $20,000, you'd need to liquidate $120,000, which at 7% could have grown to roughly $464,000 over the next two decades.

Obviously, that 7% is an assumed average return, not one that is guaranteed, and the comparison with a HELOC should also account for the HELOC interest rate, which is usually variable and currently runs at 7.4% to 8.3%.

Using a HELOC lets you keep your investments - well - invested, but you pay interest on the borrowed money. Using a HELOC for a year or two as a temporary bridge is not ideal, but still very different from carrying $100,000 of debt for many years.

Sure, your emergency fund is $20,000, uncomfortably low for you, probably regarded as a godsend for the average Joe. You have installed a new roof for your home, carried out home repairs, paid for two automobiles and nasty veterinary bills.

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Your comfort level

Having a surplus in your cash reserves after all that is actually a pretty good outcome. It's an achievement of no small nature. The chances of you having another big-ticket expense in the next couple of years is reduced.

Please don't treat a HELOC as your new emergency fund and carry the balance indefinitely. If you do decide to use it - and I still don't believe it's a good move - have a clear plan to pay it down from your monthly income.

Remember, one of the acronyms for fear is "future experiences appearing real." Yes, it's trite, but most clichés have an element of truth. You don't actually have a $100,000 emergency. You're envisioning a future in which you might have $100,000 of emergencies.

Since you asked about other Moneyist readers, one writes, "Look at the cost basis of your various investments and select to sell those with little to no gains if you want to avoid a tax hit. The rates on HELOCs are not very good right now and there are often transaction costs."

You don't actually have a $100,000 emergency.

Another adds: "If you have a lot of gain in one stock you might consider taking some of that or if you have some investments that have little to no long-term capital gain consider those." But that's so you can have $100,000 sitting around being eaten alive by inflation?

You have $20,000 in cash, $1.7 million in investments, home equity and two incomes. You would like to increase your liquidity, but you are hardly in a position of financial fragility. You have substantial assets available to you if you genuinely need cash.

There's a big difference between wanting a larger emergency fund and needing one. Your emergency fund has already done exactly what it was supposed to do: You used it to absorb a series of significant, unexpected expenses without selling investments or taking on debt.

If the roof blows off your house? Then return to this conversation about how to pay for it. Home equity and investments grow, but they are also there in case we need them. Replenishing your cash reserves is a want rather than a need.

There's wisdom in distinguishing between the two.

Related: 'This has been an emotionally difficult time': My brother has cancer and my father is 94. How do I shoulder this responsibility?

The Moneyist regrets he cannot respond to letters individually. Check out The Moneyist's private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.

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-Quentin Fottrell