Raising Emergency Cash

July 28, 2009
Michael Sheehan

Unexpected expenses can punch holes in your budget and even drain your cash reserves dry. When you need to put your hands on some ready cash, the choices may be few. Here are some ideas from financial experts.

The refrigerator has died. The car needs major repairs. The roof has sprung a leak.

Unexpected expenses like these can punch holes in your budget and might even drain your cash reserves down to the empty mark. When you need to put your hands on some ready cash, the choices may be few. Here are some ideas from financial experts.

One option is to cash in a CD or some savings bonds. Yes, you’ll lose some interest in both cases, but at least you’ll get back the money you put in. And whatever interest is lost will be minor compared to the cost of borrowing the money. You can also reinvest whatever money you don’t need immediately into another CD.

If you do need to borrow, think about opening a home equity line of credit, if your bank offers one, or tapping into an existing HELOC, if you have one. The big advantage of a HELOC is that you only borrow as much as you need and interest rates are generally lower. The interest may also be tax deductible — another plus.

A last resort is to borrow from your 401(k) plan. It’s easy and you may have up to five years to pay it back, but there are hidden costs. One is the lost profits from money that’s no longer in the 401(k); another is that you’re paying back the loan with after-tax dollars. And if you leave your job, the loan must be paid back immediately or it becomes an early withdrawal, taxable as ordinary income and subject to a 10% penalty. You can also take out a “loan” from your IRA, but it must be paid back within six months or it too will be treated as an early withdrawal.