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Where to Go — and Not Go — When You Need Money

Courtesy of USAA

If you're pondering places to drum up cash, some moves are smarter than others. Digging in the wrong spots can have serious long-term consequences. Use this guide to know where you can safely find extra funds and still protect your finances.

Safe Havens

Cutting your budget. "Before you go digging around for cash, rein in expenses. You might be surprised at the money you find,” says J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA.

Where to Find Money in Your Budget
Purchase/Estimated Cost Weekly Expense Potential Annual Savings
Daily latte $3 cup $15 $780
Cigarettes $5 pack $35 $1,820
Vending machine snacks $1 pack $5 $260
Manicures $15 visit $15 $780
Car washes $12 wash $12 $624
Lunches out $10 day $50 $2,600
Unused gym membership $20 week $20 $1,040

Tapping your emergency fund. If there was ever a time to use emergency funds so you don't miss a mortgage payment or get behind on your credit card payments, now just might be it.

When your finances improve, be sure to replenish your fund. Experts advise keeping three to six months of living expenses in an easy-to-access account, such as a savings or money market account.

Getting a second job. Consider a second job or adding hours for more pay in your current job, if you can. Building income beats tapping other resources.

Downsizing or selling a car. Get rid of monthly car payments by selling or trading in a high-dollar car. Two-car families might consider sharing one vehicle until cash flow improves.

Spending severance wisely. If you get laid off, a lump-sum payment from an employer may tempt you to pay off all your debt. Pay the amount you can while conserving funds until you find a new job. If your employer allows it, take your severance in minimum payments.

Selling some things. Jewelry, furniture or other valuables can bring instant cash at garage sales or online auction sites.

Enter with Caution

Asking for a gift. For 2009, the government allows individuals to give up to $13,000, in cash or property, to someone without paying gift taxes. Friends or family who want to reduce the size of their estate for tax purposes can do so while helping you out. A friend or relative may give an unlimited amount without worrying about the $13,000 gift tax limit if they write a check directly to a school, university or health care provider to cover what you owe, reducing the size of their estate at the same time. Ask a financial or tax advisor for details on how this affects your particular situation.

Borrowing from others. If you ask family or friends for a loan you intend to repay, it's a good idea to use a promissory note that sets a rate on the loan amount and spells out repayment terms. Before you take this step, make sure it won't ruin a relationship. Ask a financial or tax advisor for help.

Considering a signature loan. Some banks or credit unions will offer a personal or signature loan with no collateral upfront. But check the rates first — they're generally higher than rates for secured loans.

Tapping a home equity line of credit. Do this only if you have exhausted most other options. Keep in mind that unless you have significant equity and an above-average credit score, you may be denied. And if you can't pay back the loan, you risk losing your home. The process is similar to buying your home and can take more than a month to access the funds. You'll have to be approved for the loan and pay closing costs.

Borrowing from your cash-value life insurance policy. If you have nowhere else to turn, your universal or whole life policies may be able to provide quick access to funds and typically at reasonable interest rates. Make sure you monitor the effect the loan has on your policy. Don't jeopardize important life insurance coverage in your short-term quest for cash.

Looking to short-term investments, such as short-term bond funds or certificates of deposit. Consider this option only if you're not making your monthly bills, you've cut expenses from your budget, and you've exhausted your savings. You may pay penalties or lose interest you've earned, but saving your credit might be worth it to you. As with any major financial decision, you should consult with a tax advisor prior to making any decision.

Taking a 401(k) loan. This robs you of time your portfolio has to potentially recover earnings. If you must do this, know the rules. The IRS says the loan amount generally must be the lesser of $50,000 or 50% of the account balance. You generally have five years to repay the loan — longer if you use it for a down payment on a house. Pay it back on time to avoid early withdrawal penalties and income taxes. Take note: If you change jobs or get laid off, the balance is due immediately or the outstanding loan will be treated as a distribution subject to applicable taxes and penalties. Ask a financial or tax advisor for help.

Don't Even Go There!

Accessing your IRA. You can't borrow from an IRA — you can only withdraw. While contributions from a Roth IRA can be withdrawn without taxes or penalties, other withdrawals from any IRA will generally be subject to income taxes. If you're under 59½, you'll pay an additional 10% penalty. Other rules may also apply depending on your situation and the length of time you have been contributing to your Roth IRA.

Pulling cash off your credit card. You'll pay a hefty fee — anywhere from 2% to 5% of the amount — in addition to the interest you'll be charged until you pay off the balance.

Taking a payday loan. Interest rates can start at 30% and eventually incur fees that can lead to triple-digit interest rates for a loan of a few hundred bucks. Lenders often locate near military installations where they can target service personnel. Stay away.


 

 posted 2/16/2010

 

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