You work hard to provide for your family. In a financial emergency, you need to get funds together quickly to keep meeting your family’s needs while you handle a crisis.
The good news is there are various ways to get emergency cash fast. The bad news is some options can cause more problems down the line.
Emergency funds and life insurance are only two ideas that come to mind if you need cash fast—so we wanted to help you figure out what your options are. These ranked choices can give you an idea of where to find the best sources of cash and how to weigh your other options.
The best plan, of course, is to avoid a tight financial spot in the first place. While you can’t prepare for every single situation, solid financial safeguards can go a long way toward preventing a financial hurdle from spiraling out of control.
If you don’t currently use a written budget with a specific monthly savings goal, take this as your sign to start. My car would be old enough to vote if it were a person—I love my faithful ride, but it’s a good idea for me to add “new car” to the savings portion of my budget now, so I’m ready when it’s time for a replacement.
Credit cards can be a great way to earn rewards and build a strong credit score, and in a pinch, having credit available can be important. But credit interest rates can be 16-18 percent even if you have excellent credit, and more than 20 percent if you don’t. Interest can easily snowball into a deep debt problem, so it’s best to look for lower-interest sources of cash before maxing out your cards.
Having strong finances doesn’t mean just money in the bank. You’re probably balancing a list of priorities, both for now and in the future. Your retirement account, college savings, investments and life insurance are all ways to feel prepared for whatever the future may bring. Life insurance in particular is important as a way to ensure that there’s money to support your plans for your family, even if you’re not there to see them through.
No one plans for a serious health diagnosis or sudden job loss. Sometimes, no matter how thoughtfully you prepare, you can still find yourself facing bigger bills than you’re ready to manage.
Before you drain your savings, see what options you have to lessen your financial burden. Sometimes there are hardship programs or other options that can help, such as:
Talk to your mortgage lender about hardship forbearance options.
Ask lenders about options to defer or delay payments (including waiving fees).
Try negotiating a payment plan instead of facing a lump sum (e.g., medical bills).
If you can’t defray or negotiate away your financial emergency, the bottom line is that you need money, quickly. Some options are much better than others. We’ll walk you through various options, from the ones that tend to be best to the ones that don’t tend to be as helpful over the long term. Below are ways to get money that are likely to be least harmful to your overall financial health.
This is the rainy day you’ve been saving for. If you have a major unexpected expense or lose your job, emergency funds can be an ideal resource to turn to. Some people are reluctant to crack into their emergency funds, but if you have one, it probably doesn’t make sense to take on new debt in order to preserve your savings.
The main downside to tapping into your emergency funds is you’ll have to rebuild them later, but your savings should be your first stop if you’ve got them.
Emergency funds work best if they’re liquid, so you can get the money quickly when you need it. Ideally, your overall financial mix includes some types of investments like certificates of deposit or short-term bonds that are reasonably easy to sell when you need extra cash. Talk to your financial professional about your investment strategy and any tax consequences for using your investments to cover your short-term financial needs.
Borrowing money from friends and family depends on your relationship and their finances. Not all families can lend money in healthy ways. If friends and family are willing to help out, though, you can avoid applications, potential penalties and fees. Discuss a repayment plan at the beginning so everyone knows what to expect.
If you have the time, opportunity and ability, taking on extra work can be an alternative if you don’t want to touch your existing savings (or if they don’t fully cover your emergency). Taking extra projects or a side job offers the advantage of preserving your other savings. The downside is working more can be tiring and stressful, and may not produce results as quickly as you need them.
These might be worth pursuing for some families but come with downsides that feel too risky in other cases. Weigh the advantages and potential pitfalls to see if these options could help you.
If you have permanent life insurance, you may be able to borrow from the cash value component of your policy. A life insurance loan can be a good option in an emergency because you don’t have to go through an approval process or credit check like you do with other loans. There’s no set repayment schedule, and interest rates may be lower than other options like some personal loans.
Some downsides include that you’re restricted to borrowing a certain percentage of your cash value, which may not be enough to cover your needs. Outstanding loans come out of your policy’s death benefit if you pass away, which means that your loved ones would receive less money if you were to pass away before repaying the loan. You could risk losing your policy altogether if your interest payments accumulate so that you’re borrowing more than your cash value is worth.
Roth IRA contributions come from after-tax money. You can take out the contributions you’ve made without owing taxes (since you’ve already paid) or penalties at any time. If you’re over age 59 ½ and you’ve had the account for at least five years, you can withdraw earnings without taxes or penalties, too. If you’re not yet 59 ½, there are some qualified exceptions, such as certain medical expenses, that can waive early withdrawal penalties.
Downsides include taxes and penalties on withdrawals that don’t meet those criteria, and losing out on growth for your retirement fund. It’s usually best to tap other sources of emergency cash before borrowing against your retirement future, since doing so could jeopardize your ability to retire at all.
Many financial institutions like banks, online lenders or credit unions offer personal loans. You can use the funds to cover a variety of expenses (although you typically can’t use a personal loan to pay for a down payment on a home or for college tuition).
As of November 2022, the average personal loan interest rate was 11.23 percent, according to the Federal Reserve. If your credit score is on the lower side or you have other unfavorable factors in your application, APR rates at some lenders can go over 30 percent. Some personal loans also come with an origination fee, which can be up to 8 percent of the amount you’re borrowing. Unlike a life insurance loan, you’ll also likely be on a repayment schedule immediately.
Depending how much you have saved in a 401(k) or 403(b) retirement plan, you may be able to take up to $50,000 as a loan. This may be a big advantage if your emergency funds or life insurance cash value loans are too low to cover your needs. Plans vary, but they may allow “hardship distributions” in specific cases to help cover certain emergencies. If you qualify for a hardship distribution, this waives the 10 percent penalty (although not the taxes), so that could be an alternative to taking a loan.
You’ll have to pay back the entire balance, with interest, within five years, in “substantially equal payments” that happen at least quarterly. If you default on payments, the money you haven’t paid back gets treated as a distribution. That means you might owe the IRS taxes that need to be paid promptly, on top of the other financial concerns you may still be dealing with.
A life insurance withdrawal is a little different from a life insurance loan, although in both cases the money comes from the cash value (so this option is only possible with permanent life insurance, not term). Withdrawals that come from your “basis,” or the amount of money you’ve put in through premiums, are tax free (because they come from money you contributed and already paid taxes on).
A life insurance withdrawal typically reduces your death benefit, which could leave you without the level of coverage you want for your loved ones. You’ll also face taxes on withdrawal amounts over the basis.
Some ways to get emergency cash can do more harm than good to your overall financial health. Theoretically, in an absolutely critical emergency, you might reach for any option in order to get money to survive. But these are sources to avoid unless you truly have no other option.
A 529 plan offers a lot of tax advantages to grow funds you can use for education. You can’t take a loan against a 529 plan, though. If you withdraw funds for expenses other than the qualified education expenses the fund is for, you’ll have to pay taxes and a 10 percent penalty. You’re also setting back your progress and losing important opportunities to let funds keep growing for your child’s future education.
The penalties now and opportunity cost down the road add up to this being a bad source of emergency funding.
Admittedly, here at Fabric we may see the world through insurance-tinted glasses. Still, you bought life insurance for a reason. When you have loved ones who rely on you, you may feel a bone-deep need to provide for them, no matter what. A financial crisis is so scary because it throws that assurance off-balance.
Surrendering a life insurance policy means collecting the cash value, minus any taxes or surrender fees. You may end up with some cash to put toward a financial problem now, but you lose coverage for the future (and may get less money than you expected after taxes and fees).
If you have term life, you don’t have a cash value to collect, so surrendering the policy just takes the monthly premium off your plate. In some cases, that may only save you $30 or a similarly not-huge amount each month. It’s not worth losing an important safety net for the sake of a small bit of relief now.
Payday loans can get you some money fast, and that’s basically the only good thing that can be said of them. These loans generally aren’t large enough to handle a major financial issue that would have you reaching for emergency cash (many states cap a payday loan at $500). More importantly, payday loans tend to have some of the most predatory terms out there. The lenders don’t usually consider your ability to balance this debt with other financial obligations. The APR can be as high as 400 percent (and we thought 30 percent for a personal loan was high!). Some states don’t even permit payday lending because these loans tend to be so bad for borrowers. There are lots of other options to turn to, so don’t fall into a payday loan trap.
Dealing with a financial emergency is always stressful, but choosing sources of emergency cash carefully can help you balance current needs and a steadier future. Your family may be looking to you for reassurance. Making an “emergency financial plan” now may help you feel more confident to tell them you know the next steps to take a big challenge one step at a time.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards.
Fabric by Gerber Life exists to help young families master their money. Our articles abide by strict editorial standards.
Information provided is general and educational in nature and is not intended to be, and should not be construed as, financial, legal, or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. We make no warranties with regard to the information or results obtained by its use, and disclaim any liability arising out of your use of, or reliance on, the information.
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Term Life Insurance Policy Series ICC22 2205-4004 WSA and Accelerated Death Benefit Rider policy series ICC22 2205-2623 WSA (and state variations where applicable) issued by Western-Southern Life Assurance Company, Cincinnati, OH which operates in DC and all states except NY, and distributed by Gerber Life Agency, LLC using Fabric Technologies. Gerber Life Agency, LLC is an affiliate of Gerber Life Insurance Company (est. 1967). All are members of Western & Southern Financial Group (Western & Southern). Issuance of coverage for Term Life Insurance is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Product provisions, availability, definitions and benefits may vary by state. Payment of benefits under the life insurance policy is the obligation of, and is guaranteed by, the issuing company. Guarantees are based on the claims-paying ability of the issuer. Products are backed by the full financial strength of the issuing company.
All sample pricing is based on a 30-year old F in Excellent health for the coverage amount shown and a 10-year term policy, unless otherwise stated. Gerber Life Agency, LLC (GLA) is an insurance agency licensed to sell life insurance products. GLA will receive compensation from Western-Southern Life Assurance Company for such sales. The NAIC Company Code for Western-Southern Life Assurance Company is 92622.
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