If unanticipated expenses exceed your emergency fund, here’s a look at where to go next.
1. Your own emergency fund/short-term securities
Emergency funds should be held outside of tax-sheltered wrappers and include highly liquid investments like bank savings accounts, money market accounts, and so on.
2. Low-risk assets in taxable account
Next, look at other taxable holdings: investments in brokerage accounts, outside the confines of tax-sheltered vehicles.
When identifying possible securities that you could sell to raise funds, focus on liquidity, tax consequences, and any commissions you’ll owe.
3. Roth IRA contributions
It’s never great to tap your retirement assets unless you absolutely need to, but the Roth IRA offers more flexibility and has fewer strings attached than other tax-sheltered retirement vehicles.
Specifically, you can withdraw any Roth IRA contributions at any time, without incurring penalties or tax—but you’ll have fewer retirement funds working for you.
4. Life insurance cash values
Cash values that have built up in your whole life insurance or variable universal life insurance policy can be another decent source of emergency cash. You can withdraw money outright and have it deducted from your policy’s face value.
Another possibility is to borrow from the cash value of your life insurance. You’ll owe interest on the loan, and these rates can be reasonable but aren’t always low.
5. 401(k) loan
A 401(k) loan is better than a hardship withdrawal because the interest you pay will get paid back into your account.
On the downside, borrowing from your 401(k) plan short shrifts your retirement savings. Not only will you have less money working for you in the market, but having to pay the loan back with interest also means you’re less likely to be able to make new contributions.
6. Home equity line of credit
If you must take out a loan, a home equity line of credit is one of the better options.
Interest rates on HELOCs are usually reasonable relative to other forms of credit, particularly if you maintain a good credit rating, have a fair amount of equity in your home, and aren’t taking out a huge loan.
But if you’re not a perfect borrower, you could be asked to pay a high interest rate or be denied the line of credit altogether.
7. Hardship withdrawals
Unlike a 401(k) loan, which requires that you pay the money back, funds you take out of a 401(k) via a hardship withdrawal cannot be paid back.
Moreover, you’ll owe taxes on any untaxed dollars you pull out of the account. You’ll also owe an additional 10% penalty unless you’re age 59.5 or older or your situation meets one of several exceptions.
8. Reverse mortgage
A reverse mortgage allows older homeowners to receive a pool of assets that represents equity in their homes. The homeowners don’t have to repay the loan as long as they’re in their homes, but when they do leave, the borrowed amount, plus interest, is deducted from the home’s value.
Reverse mortgage rates can vary widely, so shop around and read the fine print.
9. Margin loans
A margin account allows you to borrow against the value of the securities in your brokerage account.
This option would be most attractive for those who have assets but don’t want to sell them because that would mean unloading them at a bad time and/or incurring tax consequences. If you expect to be able to repay the money quickly, a margin loan could work.
On the downside, interest rates aren’t always attractive. They’re also risky, because the securities in your account are your collateral.
10. Credit cards
This is usually not a great idea: For most people, credit cards are the single easiest way to wreck your financial standing.
Not only are rates high, but credit card companies have every incentive to keep you paying for as long as possible. Thus, minimum payments don’t make a dent in your loan’s principal.
