Tuesday, June 3, 2008

How to Raise Cash in Hard Times

With the economy slowing, layoffs rising, mortgage payments re-setting upwards, bonuses evaporating, and prices rising, we’re re-learning an old lesson. Cash is king when times are hard. People go into bankruptcy, not because they’re insolvent in an accounting sense, but because they’ve run out of cash. Many who have fallen on hard times are searching for ways to raise cash. Here are some ideas.

Best option: increase household income.

Find a higher paying job.

Work more paid overtime, if available, or get a second job.

Make a job of your hobby. Start selling the wooden duck decoys you’ve carved for fun, or seeds for the gigantic tomatoes you grow in your garden.

Second best option: reduce spending. This option really goes hand-in-hand with increasing household income. But all too many of us find it psychologically harder to cut back than to try to scare up some extra cash. Nevertheless, reducing spending is an excellent way to stay afloat financially, especially if you can establish good lifelong financial habits in the process.

Cut back on eating out, entertainment, and home furnishings. You need that 186” flat screen TV a whole lot less than you may think.

Reduce the number of cars in your household (and maybe increase the number of bicycles). If you’re a city dweller, consider car sharing services instead of ownership. Buses and subways aren't so when you consider how much less expensive they are than car ownership.

Keep your car longer. The fewer cars you buy during your life, the lower your auto costs will be. The only exception would be that if you’re willing to downsize your choice of autos in the following way. This involves changing cars with little or no net cash layout, and ending up with a much more gas efficient, but smaller vehicle. For example, if you own a three-year old GMC Yukon and are willing to trade it in or sell it in order to buy a new Honda Fit or Toyota Yaris, you might be able do this with little or no cash out of your pocket. But you’d have to be willing to drive a much smaller (albeit much greener) car.

Shop at sales and in second hand stores.

Cut out unnecessary trips to the mall, and reduce spending and gas costs.

Third best option: tap your accumulated resources. You built wealth for a reason. Now you know what that reason was.

Reach into your emergency cash fund. These are the times for the emergency fund. If you don’t have one, remember this moment when you do get back on your feet and make sure that you don't make that mistake again.

Sell unwanted stuff through garage sales or online auctions. But beware of selling family heirlooms and other valued property in a moment of desperation. Your grandmother's diamond ring and your grandfather's Purple Heart from World War II have special meaning for your family. Hold onto them.

Fourth best option: borrowing. This isn’t a good idea when your ability to repay is diminishing. Borrowing when times are hard increases your financial risk even if it reduces immediate pressures. You’ll have to pay back the loans, or be in a worse situation. But if the first three options aren't available, borrowing may be necessary.

Use credit cards, but only as much as is essential. Borrowing from a credit card is expensive, especially if you take cash advances.

Borrow home equity. But banks are rolling back home equity lines of credit, especially for people living in areas of declining real estate prices (which means most of the populated areas of the United States). If you can borrow under a home equity loan or line of credit, it will be cheaper than credit card debt. But be darned sure you can repay the loan. Otherwise, you’ll lose your home.

Borrow against your 401(k) account. This isn’t good for your long term retirement finances, because it slows down the compounding of the assets in the account. Interest rates on these loans usually aren't high. But the interest rate isn’t the only price you pay. Reduced retirement savings is also part of the equation.

Fifth best option: cashing out your future. These options are the most costly and the least desirable. Take them only if you’re desperate. You’ll be tapping into resources meant for the future, so you’re cannibalizing your future well-being for present needs.

Early withdrawal of retirement savings. You can do this from an IRA or a 401(k) at a former employer (the 401(k) at your current employment can't be withdrawn while you still work there). But you'll have to pay income taxes and a 10% penalty on the amounts withdrawn. It’s a very costly way to get cash, and you’re making your retirement less golden.

Take out a reverse mortgage. This option is available only if you’re 62 or older and own a home. These mortgages don’t have to be repaid until you’ve permanently moved away from the home or sell it, or have passed away. That’s an advantage. However, they come with high fees, and may well eliminate any inheritance from the home that you hoped to leave for your heirs. And once you take out a reverse mortgage, you will have difficulty ever again borrowing against your home. So think things through carefully before taking out a reverse mortgage. (And never take out a reverse mortgage in order to invest in something else; use it only to get money for living or medical expenses.)

Sell your life insurance policy, structured settlement, and other future stream of income. There are companies that buy rights you may have to future income. The type of assets they buy include life insurance policies, structured settlements (i.e., legal settlements from claims for injuries, which are paid out over time) and even lawsuits that haven’t been resolved yet. The buyers in these situations pay sharply discounted prices, and you should hire a fee-only financial planner to review the proposed terms and any other options you might have. A financial planner costs money at a time when you don’t have much money. But it would be money well spent, because the buyers of these assets are financial pros who are out to profit at your expense. Protect yourself and get professional advice.

Sell future appreciation in your home. This is a type of deal where a company pays you cash in exchange for, say, half the future appreciation in the value of your home. These deals are also expensive for you, and you should get advice from a fee-only financial planner before signing up for one of them.

Payday loans. These are short term loans, made a week or two before your paycheck arrives, and are repaid from your paycheck. You get the amount remaining after the payday lender takes its share. Its share will often include a very high interest charge (sometimes equivalent to over 100% per year). Avoid payday loans like the plague. Borrowing from a credit card is a bargain by comparison.

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