Many people have a plan to deal with accidents, but where they fail is in actually testing them to see how well they work.
If you built up an emergency fund, that’s great. But, do you actually go through the process of simulating an emergency so you know what to expect when you actually need the money?
Let’s say you need $10,000 in a hurry. How fast can you get that cash, and do you really have the patience and nerve to logically pick out which account to deplete first in times of crisis?
By now, I think you see the need to figure everything out before disaster strikes. Little details like how quickly you can get the funds, whether there are little gotchas like minimum balances all play a role when you actually need to withdraw money.
If you haven’t yet, no worries, but today is a good time to start thinking about the order in which you should deplete your funds. To help, here’s a guide that offers a good starting point as well as some additional information about each account at the time of withdrawal.
- Checking Account – You probably don’t keep much money in your checking account, but this is the obvious place to tap in first as it pretty much provides instant access to your funds. Make sure you know your balance, and know what your ATM daily withdrawal limit.
- Savings Account – Needing money in a hurry is the one advantage a savings account at your bank have over an online savings account. Traditional savings accounts can transfer funds to your checking account instantly, while an online savings account will probably delay that time to around three business days through ACH.
Most accounts don’t have minimum balance requirements, but it’s not the case for every bank. Make sure you know the rules, and if you don’t like what you read, switch before you are stuck.
- Taxable Investment Account – It won’t be fun if you need to sell your investments in a hurry, especially if your investment account is full of individual stocks. But this is probably cheaper than borrowing. So, when you do plan to sell, just make sure you are aware of your capital gains rate before you sell your shares.
- Home Equity Line (HELOC) – Those who have set this up can easily tap their home equity by taking a loan. The interests are tax deductible too, which is nice. However, it usually takes hundreds of dollars to start an application, and the process can take days and weeks. Therefore, use it if you already have one, otherwise, skip this step entirely.
With HELOCs, you also want to be 100% sure that you will be paying this back quickly, because HELOC abuse can run up your total debt faster than any other investment vehicle. (Yes, even credit cards)
- Credit Cards – You will quickly have access through a cash advance on your credit card, but expect to pay 3% up front plus ultra high interest until you pay it up. Obviously, this is for an extreme emergency only and may make sense if you are just using this temporarily while you try to consolidate your debt through alternative means. Otherwise, it’s one of the last places you should consider for funds
- Borrow from Your 401k – The reason why you don’t really want to get a loan from your own retirement is because you have to pay it all back immediately if you were to lose your job. Otherwise, expect to pay taxes on everything you’ve borrowed on your top rate as well as a 10% penalty.
- Your IRA – Remember that you can take out part or all your contributions of a Roth IRA after five years. Just consider this carefully because you still need to obey the yearly limits of depositing even if you saved that money back in the future. For example, taking $10,000 out of a Roth IRA means that you’ve lost the tax free growth of that same amount of funds forever.
As with any other disaster recovery plans, it’s not enough to just set it up. Know the pros and cons and the order in which you can take money out. If you can actually write down the process of how you will withdraw when you need to, then it’s even better. Otherwise, you will need to try processing all this information when you are under stress and are least able to make a logical decision.