Know Where to Withdraw Money for Emergencies

by David Ning · 13 comments

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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)
  5. 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
  6. 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.
  7. 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.

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{ 13 comments… read them below or add one }

Mike Piper February 17, 2010 at 5:48 am

Quick note regarding IRAs: For a Roth, contributions can be taken out free from tax and free from penalty immediately. It’s only for earnings that the 5 year rule comes into play. :)

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MoneyNing February 17, 2010 at 7:46 am

Thanks for pointing this out. For others thinking about this route, note that the 5 year rule are tax years, which potentially could be shorter than calendar years.

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marci February 17, 2010 at 8:36 am

I can write a check instantly… then call my Edward Jones broker and leave a message… and it’ll be taken care of. This is basically a loan against my investments – and I am able to write a check for up to 80% of my investment balance “on demand”….
There is NO time delay to me if I need to write a check – I just write it.
It doesn’t get any faster or better than that. I highly recommend it.

The Edward Jones loan does NOT sell off any investments – it is strictly a loan against what I have. The interest right now is 5.75% on anything I ‘borrow’ against my own money. Obviously, I am going to want to juggle funds later to get rid of the interest quickly, but it is for cash emergencies only – and it is GREAT to have instant access to my funds by just writing that special check …

My HELOC account is set up just in case I need it – but not in use. Wait for a Special on opening one up – the TOTAL cost for setting this up was $50….. that I figured was more than reasonable for the amount of paperwork involved. As I own my house free and clear, there is a LOT of equity available to me – ALMOST instantly….. I need to make a phone call to the bank, they will transfer the funds the same day… and so in 24 hours (except weekends) I have the money available. Expect 3-4 weeks on getting the HELOC opened up.

My money market account usually has about $3000 in it for fast cash by writing a check. Yes there is a $2500 minimum balance requirement, but the charge is minimal if I go below it.

My savings and regular checking account are also available by atm – but they are tiny accounts. Savings is just my automatic withdrawal from checking to cover the property taxes when they come due in November – so I try not to get into savings :)

Two other means available:
An advance payroll draw if your employer allows that. For me, that would be cash within the hour.
And remember the Cash value of your Life Insurance policy if you have one – time consuming tho.

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MoneyNing February 17, 2010 at 9:42 am

You seem to have plenty of ways to get cash, which is great.

The check feature from edward jones sounds like a great alternative that not every stock broker is offering.

What is the limit on those checks you can write? I assume it won’t be too close to the actual account balance since investments can be pretty volatile?

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marci February 17, 2010 at 10:24 am

Call Brett Hurliman at Edward Jones for details – my money man.
503-842-3695 He can explain it better. Tell him I said to call :) And as I just talked to him to make sure I had the details right, he’d be glad to explain it to you – even out of state.

Basically – up to 50% is Always available. Then more, depending on the types of investments one has. As I have a lot of CD’s and Bonds, I can go up to about 80% of my investments if needed…. because the CD’s and Bonds are more stable.

The checks are only limited by the amount of my investment. What ever I have, that percentage can be written – pretty much no questions asked. We will usually discuss whether it is better to sell something off ( if I need a huge amount), but the check can first be written, and then we can work out the details if I don’t want it on the books as a loan against my investments.

There is NO minimum amount due on these loans against my investments. The interest adds every month, but does not deduct from my account. That’s good in that you are not adding to your payment due, but it is bad in that your debt grows every month due to interest. So keep that in mind.

I deal with them in person – or a phone call. They are 3 blocks from my house :) It’s nice to have a personal in-person relationship with your money man :)

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Evan February 17, 2010 at 8:39 am

I would also add dividends and/or loans from a life insurance policy with cash value

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marci February 17, 2010 at 8:43 am

CASH on hand…. Highly recommend a cash stash at home in case the electric is out and the atm won’t work and you have to leave immediately. Or in your wallet. Or in your car… $500 is my magic number.
Yes, I realize it could be stolen or whatever, but it’s a small amount to risk, and has come in handy a number of times.

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Frank Frugal February 17, 2010 at 9:25 am

I agree: having at least a little bit of cash on hand can keep this question from even coming up most of the time. I personally prefer to use plastic, but having something in cash will more than make up for the risk in savings from ATM fees.

And it’s not just the minor emergencies. It could be cash for parking, a split bill, tips, or a cash-only business. Having it on hand saves an ATM fee (because when you need one, it’ll be one with a charge).

The trick is keeping yourself from spending that money just because it’s there.

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Cd Phi February 17, 2010 at 12:49 pm

Great list. For sure, my emergency fund will be taking the hit first and then if that doesn’t suffice I’ll have to visit another alternative.

@ Marci: Great point. Finding the place to stash the cash is the hard part though….

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Alcoholic Millionaire February 17, 2010 at 1:09 pm

My wife and I also keep a small CASH reserve on hand. We live in South Florida and the threat of a nasty hurricane is enough to drive this point home. During hurricane wilma most grocery stores were left without power and were operating on an all cash system. In any kind of major disaster cash is king.

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Robert February 17, 2010 at 2:46 pm

Savings account is probably the best option. Credit cards are good for dire emergencies too, but it may be a bit tempting to use. The previous poster mentioned that a nice cash reserve is a good idea, and I agree. Keep a small chunk of change around just in case of a weather emergency when electricity is down and you can’t even get money out of an ATM. It’s a great idea to throw $500 in a small fire and waterproof safe and keep it around if you ever need it. At the very least you can get enough gas to get out of town.

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basicmoneytips.com February 18, 2010 at 4:28 am

I like to use plastic, but then pay it off. Being part of some loyality program is a great way to get free stuff or cash back. My words to live by are every little bit helps.

I keep only living expenses in a checking account that does pay interest. I have it linked to a savings account where I try to keep about 6 months of living expenses. Obviously if I lost my job I would go into survival mode and cut expenses to the core.

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DSE April 25, 2012 at 5:07 pm

Roth IRAs are often not what they appear to be, and when you want to take out the loot in the future the tax rate could be a lot higher.

Better yet enjoy it and travel, you cheap lassies.

If you really want to save money do not have kids and live in a small house.

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