Raising Quick Cash in an Emergency
The air conditioner just quit, and the bill to repair it is several thousand dollars more than you have in savings. How do you finance a surprise bill like this?
Where to find cash
Beyond the retirement savings plan, here are additional options for raising funds quickly:
- Tap your home equity. Many homeowners are understandably wary of borrowing against a home that might be declining in value. But most home equity loan rates are quite low right now. If you keep the amount you borrow within reason and qualify for a loan at a good rate, a home equity loan or line of credit may be a good option. Another benefit: Your interest payments are likely to be tax-deductible.
- Put it on plastic. For a short-term fix, a credit card with a low interest rate and low balance is another possibility. But many credit card companies have been raising rates and lowering limits recently. Be sure to pay attention to your current rate and be especially cautious about cash advances, which usually carry a higher rate. Also be aware that a high balance may hurt your credit score, and if your credit card issuer has lowered your limit, that may affect your debt-to-credit ratio.
Build an emergency fund
Of course, the best source of cash for an emergency is an emergency fund. If you don’t have a cushion of savings, start building one today by reviewing your budget to look for places where you can trim expenses.
It may seem like a daunting task to accumulate the three to six months of living expenses that many experts recommend. But if you start today and set money aside on a regular basis — like paying yourself the first of every month — you’ll soon start to see your emergency fund grow.
Why not the retirement plan?
On the surface, a loan from the retirement plan can appear pretty attractive. After all, you’d be paying yourself back – and at an interest rate that may be less than typical bank rates. But here’s what else you need to consider:
- You may be repaying yourself at a lower rate than you could have earned if you’d left the funds invested.
- You may need to cut back on current contributions while you repay the loan.
- You’ll be repaying the loan with after-tax dollars. That means you’ll effectively be paying tax on the money a second time when you withdraw it after you retire.
- And the kicker? If you leave your job during the loan period, you’ll need to pay it back quickly or risk paying current-year taxes and potentially a 10 percent Internal Revenue Service penalty on the outstanding balance.
» Related information: Understanding the Costs of a Retirement Plan Loan
More articles from the Summer 2009 issue 
