Need Emergency Cash? Take a Chill Pill, Dude.
Savings rates have surged to 1980s-era levels. 7 ways to get easy access to your money.
By Sue Hermann | May 26, 2020
They say that if you wait long enough, anything can become fashionable again. Proving that point, concerns over the economic impact of a global pandemic have brought back one trend from the early 1980s: savings!
The U.S. Bureau of Economic Analysis recently reported that the savings rate surged to 13.1 percent in March. That’s the measure of how much of your personal disposable income you’ve put aside that is easily accessible if – and when – you need it.
We haven’t seen that kind of savings rate since Ronald Reagan’s first year in office – a rate almost two-thirds higher than just one year ago.
“It’s a good practice to have six to nine months’ worth of living expenses in an easily accessible emergency fund,” said Linda Cooper, consumer delivery director for BOK Financial.
You may also want to keep enough cash on hand to keep your household going for a few days – say $300-$1,000 – but Cooper cautions against more than that.
“Remember that cash at home isn’t earning any returns, and if the money is lost or stolen, it’s gone forever,” Cooper said. “A checking or savings account at your local FDIC-insured financial institution is really the safest place for the funds you want to have immediate access to.”
But don’t break out those parachute pants and jelly shoes just yet. In 2020, there are many alternative avenues to access cash. Here are seven.
Follow the money
1. Cash rewards.
“Some options are quick, simple and painless,” said Kim Bridges, director of financial planning at BOK Financial. “If you have cash rewards built up on your credit card, redeem them.”
2. Interest and dividends.
“If you have cash sitting in a taxable investment account due to interest and dividends that aren’t being reinvested, you can pull the cash out without incurring additional taxes,” Bridges said.
However, Bridges cautions against selling investments to raise cash. “In a volatile market environment, you will be locking in losses and may also generate a tax liability.”
3. Home equity line of credit.
Tap into the equity you’ve built in your home and apply for a home equity line of credit. You pay interest only on the money you've advanced yourself, never on the un-advanced amount. Closing costs are usually minimal and some banks like BOK Financial don’t charge closing costs at all, although it may take 30 to 45 days to process your application.
4. Bank line of credit.
Open a line of credit secured by a taxable investment account. Again, you’ll pay only on what you use, and rates are usually relatively low. Even better, if the pledged assets are held with the lending institution, the application process can be quick and relatively painless.
5. Insurance borrowing.
Borrow money against a permanent or whole life insurance policy. The loan isn’t considered income under current IRS rules, but you could owe income tax on any outstanding amount if your policy lapses or is surrendered before the loan is fully repaid.
6. Insurance cash value.
Withdraw cash value from permanent life insurance. A whole life insurance policy includes a face value (death benefit) and a cash value. You can withdraw up to the amount of premiums paid from the cash value. Withdrawing cash value could reduce the death benefit or extend the premium payment period.
7. Borrow against an annuity.
An annuity is typically a contract between an individual and an insurance company to cover specific goals, such as providing retirement income. Before the annuity payments begin, you can borrow against the value of your contract.
Realize that if you don’t repay the loan, it will be subject to taxation and possibly an early distribution penalty, and if you take longer than expected to repay the loan, your long-term yields will suffer.
As always, you should consult with your financial advisor and insurance provider to understand the risk and benefits of these approaches.
You never know when that next financial emergency might happen – just like you won’t know when those giant shoulder pads from the ‘80s might be en vogue again. In both cases, it’s best to be prepared – and hope it never happens.