Proven Ways to Access Cash if Your Emergency Fund Has Run Out
/As we enter the third month of 2021, the pace of the U.S. economic recovery continues to be sluggish. Some of the slowdown is the result of continued lockdowns in many states, which are keeping businesses in certain sectors from reopening or functioning at full capacity.
Industries like leisure and hospitality, for example, continue to struggle with 61,000 jobs lost in January. Retail operations also took a hit as 38,000 jobs went on the chopping block during that same timeframe1.
The good news? The unemployment rate continues to fall, dipping slightly in the first two months to 6.3% with the addition of 49,000 jobs1. Even so, this is still far short of last year’s 50-year low of 3.5%.
Today, many Americans who were laid off or furloughed in 2020 as a result of the ongoing global pandemic are still looking for work. Currently data show the number of unemployed is somewhere between 10 and 20 million people2.
If you’re among them, staying afloat financially is likely one of your most pressing concerns right now. So what can you do if you’ve exhausted your emergency fund, are no longer eligible for unemployment benefits, or both?
Reducing Expenses Is Your First Priority
The first thing you should do is look for ways to reduce your spending. Evaluate how much you need to pay for essentials like food, shelter, and medical insurance. At the same time, consider how to cut non-essential items. Eat out less often and instead prepare food inexpensively at home. Reduce the frequency of services like housekeeping and landscaping. Ask service providers for loyalty discounts. Shop around for lower car and home insurance premiums. Find out what else you can do by checking out these articles on living below your means and handling a sudden drop in income.
Painless Ways to Live Below Your Means — Wealthrise Financial Planning (wealthrisecfp.com)
How To Handle A Sudden Drop In Household Income — Wealthrise Financial Planning (wealthrisecfp.com)
If you’re still coming up short financially after going through this process, here are a six additional options to help you manage your expenses.
401(k) Loans
While it’s usually not recommended to borrow from your 401(k), these are unusual times. When you take a loan against your 401(k), you can borrow the amount you need to cover your immediate expenses without losing that portion of your investment account forever. Since you’re required to pay yourself back, you will restore your pre-pandemic balance once your financial situation improves and pay yourself back with interest along the way.
With a 401(k) loan, you avoid loan fees, high and/or adjustable interest rates, and unnecessary taxes. Not all plans allow loans, so be sure to check with your plan provider to find out if this is an option for you. As an alternative, you may qualify for an IRA hardship withdrawal. Check with this IRS link to see if you are eligible: Hardships, Early Withdrawals and Loans | Internal Revenue Service (irs.gov)
Zero-Interest Credit Cards
Another smart way to manage your expenses when your income is tight is to apply for a credit card that offers an introductory 0% APR on purchases. Some interest-free periods can last a year or longer, which means you can use your credit card to pay for essentials like food, medical expenses, and monthly bills without racking up huge interest fees.
To qualify for one of these offers, you need to have good credit (690 or higher), and you’ll be required to pay the minimum monthly amount. Here are a few that NerdWallet suggests3:
· Citi® Diamond Preferred® Card: 0% APR for 18 months with no annual fee
· U.S. Bank Visa® Platinum Card: 0% APR for 20 billing cycles with no annual fee
· Wells Fargo Platinum card: 0% APR for 18 months with no annual fee
· HSBC Gold Mastercard® credit card: 0% APR for 18 months with late fee waiver and no annual fee
If you currently have debt on a high-interest credit card, transferring that balance to a zero-interest card can keep you from piling up even more. Just keep in mind that the 0% APR won’t last forever, and you will eventually have to pay off the balance. Also, some companies charge transfer fees of 3% to 5%.
Credit Card Points and Programs
You can also increase cash by participating in credit card rewards programs as long as you pay your card balances completely and on time each month. Basically, when you make purchases, you earn points that you can then redeem for cash and other items. Before COVID-19, you may have held a credit card or two that allowed you to use your accumulated points for travel. But as the pandemic has raged on, credit card companies—even those whose primary focus has been travel—have shifted their programs to allow you to use points to pay for food, bills and online shopping4.
Start by checking with your card company to see if they, too, have shifted the focus of their plans to allow points to be spent on every day needs usually through the purchase of gift cards. If you don’t have a credit card that rewards points, here are a few cash back options recommended by NerdWallet that you may want to look into3:
· Chase Freedom Unlimited®: 0% APR for 15 months with 1.5% to 3% ongoing cash back rewards + $200 bonus and no annual fee
· Blue Cash Everyday® Card from American Express: 0% APR for 15 months with 3% grocery and 2% gas rewards + $200 cashback bonus and no annual fee
· Capital One Quicksilver Cash Rewards Credit Card: 0% APR for 15 months with 1.5% non-expiring cash rewards + $200 cash bonus and no annual fee
· Citi Double Cash Card: 0% APR for 18 months with 2% cashback rewards and no annual fee
You may have noticed that several of the rewards credit cards listed above also offer 0% APR introductory rates for a limited time. When you combine interest-free purchases with tax-free rewards program benefits, it’s like getting a double-bonus. You avoid paying interest fees while earning money for buying the essentials you need during these challenging times. Importantly, however, you need to make sure that you can pay off your balance either monthly or once the 0% period ends.
Taking advantage of the programs offered by credit card companies is a simple and easy way to put some extra cash in your wallet. But what if you’re seeking a truly significant source of cashflow? If you’re a homeowner, tapping the equity you’ve built in your home is another way to obtain a cash infusion.
Use the Hidden Cash in Your Home
Experts predict that the housing market will stabilize in 2021, and a tight housing supply will likely keep home values high. Because of this, your home’s market value may rise, and you’ll have more equity to access. On top of that, home equity interest rates should stay relatively low—ranging from 4.61% to 5.05%—so now is a good time to consider taking out a home loan5 if you are pressed for cashflow.
There are three different loan types you may want to consider: a home equity loan, a home equity line of credit (HELOC), and a retirees line of credit (ReLOC) also known as a reverse mortgage line of credit.
Home Equity Loan
A home equity loan allows you to obtain cash at a relatively low cost by using your home as collateral. If you’re able to secure a loan of this type, you’ll receive the payout as a lump sum. It also comes with a fixed interest rate. This means your monthly payment will be about the same each month, which makes it easier to budget.
Usually lenders will let you borrow up to 80% (and sometimes more) of your home’s current market value, not including yet-to-be-paid mortgage balances. As an example, let’s say you have a $600,000 home with $200,000 left on the mortgage. The amount of equity in your home would equate to $400,000. Eighty percent of that is $320,000, which is the amount you could access.
To apply, you’ll follow the steps that are typical with any loan. You’ll need to ensure your credit is in good standing to prove you have a solid track record of paying your bills. You’ll also need to provide documentation showing that you can afford to pay back the loan.
The latter may be problematic if you’re currently unemployed. It’s still possible to obtain a loan of this type, but you’ll likely have to do one or more of the following: prove you have unemployment benefits or other streams of income, get a cosigner, provide collateral, or borrow money from a friend or relative.
Home Equity Line of Credit (HELOC)
A HELOC is similar to a home equity loan, but it tends to be a bit more flexible. Instead of getting a one-time, lump sum of cash, you take out money as you need it, up to a pre-approved maximum. A downside of a HELOC is that the interest rate varies, so the amount you pay can change month to month. This can make it difficult to budget; and ideally, you treat a HELOC as a very temporary loan.
Like a home equity loan, the lender will usually allow you to borrow 80% or more of your home’s value. The process to apply is the same as well.
Once your HELOC is set up, you can draw funds from it over a predetermined period of time. After that, you’ll enter the repayment period where you’ll have monthly payments to make over a designated timeframe. During this phase, the HELOC acts much like a standard mortgage loan.
Retirees Line of Credit (ReLOC)
For homeowners over age 62, there’s a third option to consider: a ReLOC. Also known as a reverse mortgage line of credit, it’s a way to turn your home’s equity into cash while you still live there. To qualify, you must own your home, and it must be your primary residence.
A ReLOC is similar to a HELOC with several advantages. Some of these include6:
· Your line of credit continues to grow each year
· You don’t make monthly mortgage payments – the lender pays YOU
· The payments you receive are non-taxable because they’re considered loan proceeds, not income
· You don’t pay back the money until you no longer live in the house permanently
· The loan can’t be canceled, reduced or frozen – as long as you keep up with mortgage-related obligations such as HOA fees, property taxes, homeowner’s insurance, and standard home upkeep
· You owe only what you borrowed, even if your home’s value decreases
There are a few disadvantages to be aware of as well. You’ll be required to pay for mortgage and homeowner’s insurance as long as you have the loan. If you fall behind on property taxes or insurance premiums, it could trigger a loan default or home foreclosure.
As with a traditional loan, you’ll also need to pay closing costs that may include servicing and appraisal fees. You can also expect to pay origination fees, which can run as high as $6,0007. These expenses can be taken out of the loan, but it will reduce the amount of cash you can withdraw. ReLOCs also tend to have higher interest rates versus traditional loans.
The loan will also become immediately due if you don’t maintain the house, you fail to pay property taxes or insurance premiums, or you move out, live outside the home for a year or more, or pass away.
The latter could put your heirs in a bind since they will be responsible for repaying the loan. In this case, they’ll have the option of selling the house, paying off the loan with their own funds in order to keep the house, taking out a new traditional mortgage to pay off the loan, or allowing the lender to proceed with foreclosure if they choose not to keep the property.
However, tapping into your home equity may be a necessity as it can serve as a viable source of income during this time of need. Whether you opt for a home equity loan, a HELOC or a ReLOC depends on your individual financial situation. For help deciding on the best choice for you, speak to a lender about your options.
Economic Recovery Is On the Horizon
Whether your strategy to make ends meet includes obtaining a 401(k) loan, applying for a rewards program credit card or taking out a long-term home loan, things will likely improve as the year progresses.
As more vaccines become available and the number of COVID-19 cases decreases, the economy will likely begin to recover. When that occurs, closed businesses will reopen and return to full capacity, and they’ll be looking to hire new employees like you to help them grow. If you’re a business owner, you’ll finally be able to welcome your customers back and once again start to prosper.
Remember that wealth is the result of smart spending, discipline, a lifetime of hard work, and good planning — even when times are tough. By reducing your expenses and consistently using strategies like budgeting and saving, you’ll be able to manage your money more effectively so it can grow over time.
In the meantime, please reach out with any questions about your finances. I’m always happy to help!
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Sources:
1 - Thorbecke, Catherine. (Feb. 5, 2021.) “Unemployment rate dips to 6.3% as employers add 49,000 jobs last month.” ABC News. Retrieved from https://abcnews.go.com/Business/unemployment-rate-dips-63-employers-added-49000-jobs/story?id=75667033.
2 - Long, Heather. (Feb. 19, 2021.) “How many Americans are unemployed? It’s likely a lot more than 10 million.” The Washington Post. Retrieved from https://www.washingtonpost.com/business/2021/02/19/how-many-americans-unemployed/.
3 – NerdWallet. (Feb. 23, 2021.) “Best 0% APR and Low Interest Credit Cards of February 2021.” NerdWallet.com. Retrieved from https://www.nerdwallet.com/best/credit-cards/low-interest.
4 – Tsosie, Claire. (Mar. 19, 2020.) “3 Ways Credit Cards Can Help You Ride Out a Crisis.” NerdWallet.com. Retrieved from https://www.nerdwallet.com/article/credit-cards/ways-credit-cards-can-help-ride-out-crisis
5 – Wichter, Zach. (Jan. 4, 2021). “Home Equity Rates 2021 Review and Forecast.” Bankrate.com. Retrieved from https://www.bankrate.com/home-equity/home-equity-rates-forecast/.
6 – Paris, Mayra. (Feb. 1, 2021.) “What is a Reverse Mortgage? Pros and Cons.” Money.com. Retrieved from https://money.com/what-is-a-reverse-mortgage/.
7 – Branson, Michael G. (Dec. 2, 2020). “Reverse Mortgage Closing Costs & Fees Explained.” All Reverse Mortgage, Inc. Retrieved from https://reverse.mortgage/closing-costs.
