Need Quick Cash? Christine Benz’s Top 5 Tips to Boost Your Emergency Fund

Morningstar Director of Personal Finance Christine Benz understands that emergencies happen, and you may need cash quickly, despite long-term plans to manage and grow your family’s assets. She’s come up with a valuable checklist of top tips to get that money when you need it most. Just keep in mind that, when the clouds pass, you’ll need to double down on your financial discipline to rebuild the coffers you’ve just depleted.

Contents

Build an emergency fund BEFORE an emergency.Consider withdrawals from low-risk assets in taxable accounts.Tap those retirement accounts but be careful.Get cash from your life insurance policies.Take out a home equity line of credit.

Build an emergency fund BEFORE an emergency.

Don’t wait for the unexpected. If possible, set aside emergency funds that include highly liquid investments like bank savings and money market accounts. Avoid assets that are held in tax shelters, like 401Ks and educational savings plans, because you’ll probably incur penalties for early withdrawals on these instruments. However, some tax-sheltered investments come with provisions that allow withdrawals for emergencies.

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Consider withdrawals from low-risk assets in taxable accounts.

Next, Benz says to consider getting quick cash from taxable accounts that incur the smallest penalties for withdrawal. “Taxable accounts” are roughly defined as nonretirement and non-tax-sheltered instruments, like taxable bonds and bond funds, multi-asset funds, actively managed stock funds (including mutual funds) and high-dividend paying stocks and funds. Tax efficiency is the name of the game, ruling out many of the categories listed above.

Instead, consider drawing capital from more efficient instruments like municipal bonds, I Bonds, Series EE Bonds, individual stocks, equity exchange-traded funds, equity index funds and master-limited partnerships. Stocks that don’t pay dividends could be the best choice for folks needing quick cash because buying back shares at lower prices is often possible.

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Tap those retirement accounts but be careful.

This popular strategy falls into two categories, Roth individual retirement and traditional 401(k) retirement accounts. Roth holders pay tax as they go so there is no penalty for withdrawing cash when needed. However, depleting those funds may impact your ability to retire with sufficient assets. Alternatively, 401(k) accounts offer two ways to get fast money before the age 59 ½ withdrawal threshold.

Benz believes the best option when raising emergency cash from a retirement account may be to take a loan that needs to be paid back, incurring a tax bill and 10% penalty. A second option is to take a hardship withdrawal, which is a one-time, fixed amount of money to cover an “immediate and heavy financial need.” You’ll need to jump through administrative hoops to get approval for this cash influx, which counts as taxable income and also incurs a 10% penalty.

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Get cash from your life insurance policies.

Whole life and universal variable life insurance build cash value that can be a lifesaver in an emergency. As a rule, you can withdraw money from these policies, and it will be deducted from cash value. You may also be able to borrow from cash value, instead of taking an outright withdrawal. Keep in mind you’ll owe interest on the loan, which is set by the insurer. And no, “term life” insurance policies do not build cash value.

Take out a home equity line of credit.

Do you own a home? If so, Benz says to think about emergency cash from a home equity line of credit, if you’ve built at least 15% to 20% equity. Watch out if you don’t have a good credit rating or are taking a large loan relative to equity size. Banks and loan companies can charge high interest rates on this type of debt or deny the line of credit altogether.

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