The Best And Worst Ways To Raise Cash Quickly

By Stephen D. Simpson, CFA | June 03, 2011 AAA
The Best And Worst Ways To Raise Cash Quickly

Despite even the most careful planning, people can find themselves needing to raise cash on short notice. These situations are often emergencies and the pressures and worry that go with them often lead people to take the fastest or easiest routes to raising cash, but not necessarily the best. To the extent that someone can keep their wits about them and make informed decisions under difficult circumstances, it is possible to raise cash in ways that may not have bad long-term consequences.
TUTORIAL: Money Market: Certificate Of Deposit (CD)

Emergency Savings - Build Them Now!
Before going over some of the ways that people can raise cash on short notice, it is worth mentioning that people should never put themselves in that situation to begin with if they can help it. Everyone should strive to have three months (or more) of emergency savings in the bank - ideally in a high-yield online savings account or a money market account. Next to eliminating credit card debt, building an emergency nest egg is one of the most fundamental steps in planning for a better financial future. (For more, see Build Yourself An Emergency Fund.)

Do You Really Need Cash?
Before assaulting the couch cushions in search of lost change, consider whether or not cash is really needed. Maybe the "emergency" is a forgotten birthday, a broken appliance, or a sudden need to travel to see family. In these cases, you may already have non-cash alternatives on hand. Many people receive gift cards and then forget to use them; an unexploited gift card can certainly do in a pinch if you need to give a gift; either through re-gifting the card or actually selecting something for them.

Along similar lines, there are many credit card programs out there with rewards programs. While some cards pay out cold hard cash (or have a cash option), others build points that can be used to get merchandise, gift cards, airline tickets and so on. While it is almost impossible to exchange rewards merchandise or tickets for cash, there may be cases where the merchandise or ticket itself fills the gap and solves the problem. (For related reading, see Drawbacks Of Travel Reward Programs.)

The Worst Options
Apart from borrowing from friends and family (which may be an absolute no-go for some people), the worst ways to raise cash in a pinch come with high interest and expenses attached to them. A payday loan, for instance, is certainly one way of getting hundreds (and in some cases, thousands) of dollars with virtually no collateral and minimal paperwork. Unfortunately, the effective interest rates on these loans (including various fees and charges) can easily exceed 100% per year. If it's truly a life-or-death situation and there is no other way, it is an option, but it is a very poor option. (For more, see Payday Loans Don't Pay.)

Along similar lines, title loans (loans where the title to the borrower's car is used as collateral) are a very expensive and risky option for raising money. People should also be very careful of using cash advances from credit cards. While these can be very convenient, the interest rates are very high. What's more, unlike normal purchases, interest on cash advances typically accrues from the moment the advance is made.

Bad (But Not the Worst) Options
Although not a "good" option by any stretch, withdrawing money from a retirement account is arguably better than borrowing from a payday lender. The problem with these withdrawals is that the government not only charges regular tax on the amount involved, but also a penalty on top of that. There is a loophole, though. When you transfer an IRA, you can elect to have the money sent to you, with the understanding that you must deposit it into the new IRA account within 60 days or face that withdrawal penalty. Assuming that you are sure you can replace the money within the 60 days, it is at least theoretically possible to use an IRA transfer as a temporary "loan" to yourself. Be warned, though, the IRS only allows one such transfer per year. (Avoid paying excess taxes by learning some simple transfer rules. For more, see Common IRA Rollover Mistakes.)

People can also raise cash by selling CDs or savings bonds before they have matured. There is always an opportunity cost involved (and often a penalty to the interest rate for a CD), but it is a quick and legal way to raise cash. A less convenient alternative is to sell collectibles, like coins, stamps or jewelry. Unfortunately, a fast sale often means selling at a retail shop and that means wide bid/ask spreads and little chance of getting fair value.

Writing covered calls is also an option to consider for producing cash. With a covered call, an investor basically sells the right to buy shares he or she already owns at a predetermined price in exchange for a small premium. That premium goes into the investor's account and can be drawn out like any other cash. Keep in mind, though, that if the stock moves up to a price where the call can be exercised, those shares will be sold. (Learn how this simple options contract can work for you even when your stock isn't. For more, see The Basics Of Covered Calls.)

TUTORIAL: Money Market: Treasury Bills (T-Bills)

Better Options
One of the better options for raising cash on the quick is to sell losing positions in a portfolio. If there is a stock, ETF or mutual fund that has been a disappointment, it could be a good source of emergency cash. Do be sure to keep in mind any tax ramifications, as well as wash sale rules, but it is better to raise cash by selling stocks that are broken than those positions that are still promising and undervalued.

Borrowing against a life insurance policy or 401(k) is another option to consider, when circumstances allow it. In the case of life insurance policies in particular, the rates for loans are often fairly competitive and the payback terms are generally quite flexible. With 401(k)s, a fairly large percentage of plans allow these loans and the terms are usually much better than borrowing from credit cards or payday lenders (though be careful of the fees). The biggest risks to keep in mind are the opportunity costs of pulling money out of retirement savings and the fact that a failure to pay back the loan will be treated as an early withdrawal and incur that 10% penalty. (For more, see An Introduction To The Roth 401(k)).

It may sound baffling crazy, but sometimes a pawn loan may be one of the best options for raising cash. If you have certain reliably popular pawnable items like gold jewelry, musicals instruments, tools and firearms, this could be a good option. It is true that pawn loans carry high interest, but that is only relevant if you attempt to redeem the item - in other words, you may regard a pawn "loan" as an opportunity to sell these items and raise cash. Now a pawn shop will never pay full value - 50% to 75% is the best to expect - but if you cannot wait for a buyer or bidder on Craigslist, eBay or other sale sites to appear, selling to a pawnbroker is something to consider. (For related reading, see Should You Pawn Your Valuables?)

Plan Better and Find the Least-Worst Path
The odds are that bad circumstances will increase your need for quick cash. Still, there is no reason to make things worse by creating an even bigger problem for the future. Think through your options carefully, and look for the cheapest sources of cash you can find. And then once the crisis passes, be sure to create an emergency savings account to prevent a repeat occurrence.

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