Even the most careful people can encounter a financial emergency and need cash fast to deal with it. Unexpected auto and home repairs, health emergencies, and work layoffs are common situations.
Raising money the smart way can minimize the impact. Choose the wrong way, though, and the impact can be long-term. Here are ways to come up with the money you need, ranked from the smartest to the dumbest.
1. Raid Your Emergency Savings
If you have a liquid fund for emergencies, you're all set. This is that rainy day.
Just take out what you need instantly, then replace the funds when you can.
The only cost is the loss of whatever interest would have accumulated before you replace the money.
2. Sell Personal Property
Inventory possessions, looking for items that are expendable, then 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 your items.
Selling used items doesn't increase your debt or tax load.
You lose the use of the things you sell. You must also deal with advertising and potential buyers.
3. 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.
You get needed money quickly this way, without any impact on your credit history. Monetary gifts, especially from parents, can be part of their estate planning.
Family loans and gifts can strain relationships. If you borrow, be sure to pay the money back quickly.
4. Pull Money from A Non-Retirement CD
If you have funds in a non-retirement Certificate of Deposit, you can access those funds, even before maturity.
You get fast access, and income taxes have already been paid.
You'll pay a penalty for early withdrawal, usually three months of interest.
5. Liquidate Investments
If you have stocks, bonds, or mutual funds, you can liquidate part of your investment.
It's your money, and you can get it quickly.
If investments have gone up, you may be liable for capital gains taxes. If they've gone down, you lock in your losses.
6. 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.
It's 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.
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.
7. 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.
With a HELOC, access to funds is quick, while a new loan will take some time to close.
If you take this route, you add to your debt load and put real property at risk. Interest takes another chunk out of your income.
8. 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.
You get your cash instantly.
You'll pay up to 4% of the amount immediately, plus a usurious interest rate (up to 30%) if you repay over time.
9. 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.
If you're older than 59 ½, distributions may come without an up-front penalty. It's your money, so there's no hit on your credit record.
You'll pay income taxes on the money, regardless of your age. If you're younger than 59 ½, you'll also pay a 10% penalty for an early distribution. You're also hurting your retirement income. Borrowing from a 401(k) is risky. If you can't repay, you get hit with the tax and penalties.