As I mentioned in my last post, Borrowing from yourself first is key. There’s no financial point in taking on more debt when you have the means sitting right there in front of you.
Psychologically it might be a different story (who wants to deplete their nest egg?) but desperate times call for desperate measures….or something like that. The point is, emergencies and other *needs* justify the right to dip into your savings accounts or emergency funds. It may suck, but you could always fill it right back up as needed! You already did it once, right? (I’m sure you’ll tell me if I’m wrong :))
The Best Order To Take Out Money.
So let’s say something comes and you need X amount of dollars in X amount of days. Where would you start? Your savings? Credit cards? 401(k)? (Lord I hope not) With all the options we have at our disposal, I thought it would be a good exercise to run down the list in the order I’d personally hit up myself. After all, not all tools are worth using just because we have easy access to them! It’s all about starting from the smarter routes first, and checking them off as the amount of money (and the emergency) grows. In my opinion, here’s the best order to take out money:
1. Savings Accounts
I keep only what I need for bills and monthly expenses in my checking account, so all extra cash goes right into our savings accounts (after investing, paying extra towards mortgage, etc). This is the first place I’d look because this money isn’t *needed* or being used for anything in particular. It helps with all splurging desires, over budgeting issues, or anything else that requires smaller amounts of money not accounted for. (we usually have anywhere from $500-$2,000 in there at a given time)
2. Emergency Fund
I’d hate to do it, but life ain’t perfect and I ain’t trying to break my debt-free (besides mortgages) record right now. We have $10k stored in our emergency fund to cover worst-case scenarios and to help us sleep better at night. It also works great for floating money and instances when someone asks to borrow money – and I offer it ;) Again, pulling money from here isn’t desirable, but it’s there for a reason and you could always fill her right back up when issues pass over.
3. Fun Fund
It sounds weird listing this as #3 here, but I never like playing around with the money stored in my fun fund: A box at home specifically set aside for true-life actual FUN. As hardcore as I am about saving/investing/being frugal, I’ve gotta allow myself a little breathing room to really *enjoy* what money can buy us in life. Plus, I never have much in here anyways ($200-$500 max), so it would have to be getting bad if I started extinguishing options #1 and #2 above. And in which case I’d need this money even more to help pep myself up at that point ;)
4/5. Family Members/Credit Cards
I’m not sure which I’d choose first if it came down to this, so I’ll put both here under the assumption it’s going to take some time to repay. If it’s 3 months and under, I’m rolling with my friends/family. If we’re talking 6 months or even a year+ to pay back, then it’s on to the credit cards! We have some serious limits on both our house cards & personal cards, so I reckon we could grab up to $70k here. Not optimal, but with rates hovering around 6% for us it would be better than what’s next on the list. Plus, USAA is always rockin’ out special rates when you call BEFORE using it (either purchases or cash advances) so I guarantee we could lock one in around 4% at the most.
*If you have jacked up credit or jacked up credit CARDS however, consider this your #7 option – It could seriously screw you up.
6. Bank or Credit Union Loan
The only bank loans I’ve ever taken out were for our mortgages, so other than those I’m not sure what loopholes or rates you’re really going to get. I’m assuming if I need money for something non-housing related I’d take out a personal or business loan (if applicable). And I’m guessing that would run us at least 8-9% with GOOD credit. But again, I have no direct experience with this one so I’m hoping someone else could share. Regardless, you’re still swimming above water here. Update: Be sure to check out local Credit Unions too! Totally forgot about those – you can usually get a loan a bit cheaper than your average bank. The last car loan I had was through a credit union and I want to say I got it for only 4% when rates were 6%+ a couple years back.
7. Home Equity Line of Credit
Or a “HELOC” as many of us like to call it. I drop this guy here at #7 due to the recent fiasco going on with the housing industry. If you’re in the same situation as I am and your house is underwater, you can forget even having this option. Homeowners that have equity in the house, however, can usually pull from that by either taking out a loan against it or by refinancing and “cashing out” the difference. Neither option is that great since you’re backing it up with YOUR HOUSE, but it’s still better than the options that are soon to folllow. HELOCs can have interest rates ranging from the mid 2%’s (it’s rare, but it’s possible in this economy – ours is at 2.8% currently, un-locked) up to 10%+ depending on your situation and your credit. Just be sure to do your research before jumping in and using your house as an ATM.
*****Now, from this point forward $hit has either hit the fan or you’re up to some cool business plan that requires a major investment – or at least I hope ;) Either way, here’s how I’d personally proceed:
8. Roth IRA/Traditional IRA?
This is where it starts getting scary! Anytime you’re forced into pulling from your retirement funds things BETTER be bad. Don’t be one of those idiots who uses their 401(k) as an Emergency Fund – that’s not what they’re intended for!!! But if you’ve exausted all other options, then yes start pulling from your Roth. Take out only what you’ve contributed so far over the years and you won’t pay a dime in taxes (you already paid that before you xfered in the money). Be VERY carefull here though because when you start pulling out everything, including any profits you may have earned over the years, you’ll start accruing hefty fines! It may not matter to you at this point, but just keep it in mind. Read the IRS’ online IRA resource guide for further information – I’m not a professional!. You could also pull from your Tradional IRAs as well if you have those accounts. I don’t so I’m not too familiar with them, but it would still fall under #8 here in the list. Check out more on the IRS’s site concerning Traditional IRAs.
By this point you’re running out of options and your 401(k) is basically your last resort. The first thing to do is to see if you qualify to take out a loan against it. In a perfect scenario this would mean taking $XXXX out, and then paying $XX back on a scheduled basis until it’s filled back up. It’ll cost you a relatively small setup fee, but you won’t have to deal with tax penalties and the lot. You WILL, however, have to make sure you remain at your employer the entire time. If you quit or get laid off, you’re usually responsible for paying it back ASAP. Call your plan holder for additonal details, or start researching the IRS’ website on 401(k)s (again, don’t take my word for it)
10. PayDay Loans/Cash Advances
Most of you know how much I despise payday loans, but it’s still “an option” even if not much of one. At the very least it’s worth a little research in seeing what the best offers are here. Make sure to determine *exactly* how long you think it will take to pay it all back! The more you extend it or stop paying it back, the higher your fees and interest rates go (we’re talking 30-40%+). In other words, this is one of your last options.
There you have it – the best order to take out money! There are some other avenues I’ve skipped along the way (certain types of insurances for example), but they’re a bit out of my scope for this blog and probably don’t affect most of the readers here anyway. I do hope this list helps though!! Once again it all comes down to personal preference and what YOU are comfortable with – don’t go and do something drastic before consulting a professional (have I hinted, enough?) :) Now let’s just pray you never have to make it past option #7!