There are times when emergency funds do not adequately cover the emergency life throws at you. In those moments I immediately start scrambling to come up with ways to raise cash in a hurry. But you cannot simply throw caution to the wind, because often times irrational moves now cause painful tax consequences later. Here are a few ways to raise cash in an emergency, without over-taxing your life later on.
1. Sell stocks outside of retirement accounts. When my first child was born there were some complications, and extended hospital stays for mom and daughter. The bills were astronomical, and fortunately my insurance plan paid the majority of the bills. However, it was a high-deductible plan, so I still had to come up with a bit of cash out of pocket. The first thing I did was sell company stock, and one other stock I held at the time, both outside of retirement accounts.
The only downside to this plan now is that stocks have taken a beating in recent months. If you sell now you will likely realize a huge loss on paper. That’s good for a tax deduction, but bad for your portfolio. Regardless, it is probably the fastest way to liquidate an asset and convert it to cash.
2. Withdraw Roth IRA contributions. Many people are not aware that is possible to make Roth IRA withdrawals at any time, as long as you only withdraw contributions. For example, if you have contributed $500 to a Roth IRA, and the current account balance is $580, you can withdraw the first $500 without penalty. The remaining $80 represents earnings and may not be withdrawn without penalty.
It is important to keep up with the amount of money you have contributed to your plan should you ever have to go this route. One negative aspect of withdrawing this money is that it cannot be replaced. In other words, if you withdraw $500 from your account that is $500 you are not allowed to “redeposit” back into your Roth IRA.
3. Sell something, or a lot of things. If you are in a real crunch for cash, consider selling whatever you can get your hands on. Have a yard sale for low-value, high quantity items such as small toys, gently used clothing, etc. Advertise larger items such as furniture on Craigslist, and sell smaller items such as DVDs and books at eBay.
You may also consider pawning jewelry, particularly gold, because as the dollar continues to weaken gold prices should trend upward. This is not an excuse to run out and buy gold, but if you have gold pieces or gold jewelry on hand, and need emergency cash, it could be a valuable trade.
4. Access home equity. With declining home values, and tightening lending standards, this one might be a little tougher than in years past. Still, home equity provides access to cash in an emergency situation, and the good news is the interest is tax deductible, and the payment terms may be stretched out longer than unsecured loans. However, remember you are taking on more debt and further leveraging your home. I only recommend doing this in a real emergency–remodeling the kitchen or buying a boat does not qualify.
5. Take out a 401(k) loan. Borrowing from your 401(k) has become a popular option for raising cash, but I’m still a bit skeptical. For one thing, if you leave your job (voluntarily or otherwise) the loan is due immediately. Another complicating factor is that if you fail to repay the loan, or miss a payment, the money is considered as a withdrawal for tax purposes and you are subject to penalties.
6. Ask for help from friends and family. Notice I didn’t say “borrow” from friends and family. Borrowing money from family members changes relationships, and I generally advise against it. I personally do not lend money to family members, but if I have the money on hand, and they have a bona fide emergency, I would rather simply give them the money, no strings attached.
Again, it is important to maintain a healthy emergency fund so you don’t have to resort to one of the above options. However, there are times when the emergency is larger your ability to cover, or you have a string of emergencies that deplete your funds faster than you can replenish them. In those cases, raising emergency cash may be your only option.
In a real crunch, you could turn to social lending with companies such as Lending Club where you can apply for up to $25,000 and have your loan funded by other investors. Rates vary based on your creditworthiness, but social lending is a welcomed alternative to a tightening lending industry. Read more about my experience in my Lending Club review.