MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
WHAT TO DO WHEN YOU NEED EMERGENCY MONEY
(June 1, 2007) -- It happens to the best of us. When you least expect it, you lose your job, or the car’s transmission fails, or your dog requires surgery. In the best case scenario, you have an emergency fund set aside for unexpected disasters like these. But if you don’t and you need to raise money quickly, according to the Virginia Society of CPAs, there are two main avenues to pursue. First, evaluate your options for raising cash, and then, work with your creditors to defer or lower payments until you’re back on your feet financially. Here’s some helpful advice.
Sell assets you don’t need
Perhaps your circumstances have changed and you don’t really need that second car or the boat that’s been sitting in your driveway. By selling assets that you’ve determined are expendable, you may be able to raise the cash you need without going into debt.
Seek help from relatives and friends
Depending on your circumstances, borrowing from a friend or relative you trust may make sense. Just be sure to keep it professional and put everything in writing. Using a promissory note form available at office supply stores and online will ensure that you and the lender understand the terms of the loan.
Borrow against the cash value of your insurance policy
If you have a whole life insurance policy that has built up some cash value, you may be able to borrow against it. Because a loan against your policy is a secure loan, the rate is likely to be lower than other borrowing options. Just remember that the main purpose of life insurance is the death benefit. Your death benefit will be reduced by the amount of the loan plus any unpaid interest if you haven’t repaid the full amount of the loan at the time of your death.
Tap your home equity
A home equity loan or home equity line of credit is a good source of emergency funding because the interest rate you pay is generally tax deductible and is likely to be lower than the rate for credit cards and personal loans. Just be sure you understand what you’re getting into. Since home equity debt is secured by the equity in your home, you’re putting your house at risk in the event you can’t repay what you borrow.
Use credit card advances with caution
With a credit card advance, you get immediate cash with no paperwork. However, the interest rate for cash advances is usually higher than the rate for purchases and there may be a processing fee. Credit cards are a good alternative when you have a short-term need and are reasonably certain that you can pay back the amount that you borrowed in a month or two.
Think long and hard before you borrow from your 401(k)
When you need money in an emergency, borrowing from your 401(k) retirement plan is tempting, especially since 401(k)s often represent a large sum of cash and most company plans make it relatively easy to borrow. But CPAs advise that you borrow from your retirement plan only as a last resort. Not only will you lose the benefit of compounding on the money you withdraw, but you could compromise your long-term financial security if you do not have a strategy to repay the money borrowed from your retirement plan.
What’s more, if you leave your company and still have an outstanding balance on a plan loan, you’re generally required to repay the loan in full within 60 days. If you don’t and you're under age 59½, you will be subject to a tax penalty in addition to the tax.
Consult with a CPA
A CPA can help you determine the best way to raise the cash you need and can also help you develop a plan for creating an emergency fund. Preparation is the best way to weather a financial emergency.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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