Smart Ways to Raise Cash in an Emergency

Even the most cautious people can encounter a financial emergency and will need cash fast to deal with it.  Unexpected auto and home repairs, health emergencies, and work layoffs are common situations that can occur.

Raising money the smart way can minimize the impact.  However, making the wrong choice can have a long-term impact. Here are some ways that you can come up with money, ranked from best to worst-case scenario.

• Raid Your Emergency Savings - If you have a liquid fund for emergencies, you’re all set. This is that rainy day.

Benefits - Just take out what is needed, then replace the funds when it is possible.

Costs - The only cost is the loss of whatever interest would have accumulated before the money is replaced.

• Sell Personal Property – Look for items that are expendable and sell them to cover your needs.  Online sites like Craig’s List [www.craigslist.com] and auction sites like eBay [www.ebay.com] can help sell items fast.  Research values and don’t overprice the items.

Benefits - Selling used items doesn’t increase your debt or tax load.

Costs - You lose the use of the things that are sold. This also entails dealing with advertising and potential buyers.

• Get in Touch with Relatives - If you’re on good terms with relatives, hit them up for a short-term loan or even a gift.  If the loan is interest-free, there’s no tax liability, and gifts up to $12,000 per person are also tax-free.

Benefits – This is a fast way to get money without any impact on your credit history.  Monetary gifts, especially from parents, can be part of their estate planning.

Costs - Family loans and gifts can strain relationships.  If you ask for a loan, be sure to pay the money back quickly.

• Pull Money from a Non-Retirement CD - If you have funds in a non-retirement certificate of deposit, those funds can be accessed even before maturity.

Benefits – You’ll have fast access to the needed cash, and income taxes will already have been paid.

Costs – There will be a penalty for early withdrawal, which is usually three months of interest.

• Liquidate Investments - If you have stocks, bonds, or mutual funds, you can liquidate part of your investment.

Benefits – This is your own money that can be accessed quickly.

Costs - If investments have gone up, you may be liable for capital gains taxes.  If they’ve gone down, you lock in your losses.

• Access Cash Value of Whole Life Insurance - If you have a whole life insurance policy, it accumulates cash value over time.  You can borrow against this cash value from the insurance company or terminate the policy and get it all.

Benefits – This is your money.  You can usually replace the policy with a lower-cost term policy, and the cash is available quickly.  In most cases, there is no tax liability.

Costs - If you borrow against the value, you must repay the loan or you’ll lose the coverage.  If you terminate the policy, you lose the coverage.

• Use Home Equity - If you have a Home Equity Line of Credit (HELOC), any available credit can cover your emergency.  With a good credit score and equity in your home, you can also obtain a loan on that equity.

Benefits - With a HELOC, access to funds is quick, while a new loan will take some time to close.

Costs - If you take this route, this adds to your debt load and puts real property at risk.  Interest takes another chunk out of your income.

• Take a Cash Advance on a Credit Card - This is one of the worst ways to get cash.  It only makes sense if you are absolutely sure you can pay off the advance almost immediately.

Benefits - Get your cash instantly.

Costs - You’ll pay up to 4% of the amount immediately, plus a usurious interest rate (up to 30%) if it is repaid over time.

• Use Retirement Funds - Funds in IRA, SEP, 401(k), and 403 (b) accounts are a last-ditch source of emergency cash.  You can take distributions from these accounts or borrow against a 401(k) account.

Benefits - If you’re older than 59½, distributions may come without an up-front penalty.  It’s your money, so there is no hit on your credit record.

Costs - You’ll pay income taxes on the money, regardless of your age.  If you’re younger than 59½, a 10% penalty will also apply for an early distribution.  Not only are you hurting your retirement income, but borrowing from a 401(k) is risky.  If you can’t repay, be ready to get hit with the tax and penalties.

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