For years, you've heard me talk about building up an emergency fund that can cover at least six months of living expenses. While I believe that's one of the best financial moves you can make, I know many of you are struggling and don't have the luxury of thinking about emergency funds. Ultimately, I hope you find more secure financial footing, but for now, I'm here to tell you not to panic: You probably already have a pseudo emergency fund.
You know how I've always told you to pay off your credit cards but not to cancel them? If you have some old, unused cards, call the issuers now, while your finances are in good shape, and see if you can boost your credit and cash- advance limits to use as a last resort. I repeat: last resort. This is for paying the gas bill or the rent, not for buying a new pair of sandals.
Interest rates on cash advances are 20 percent or more. So if you do end up having to use an advance, go to bankrate.com to look for a new credit card with a low interest rate on balance transfers. But read the fine print on the card offers carefully. The great introductory rate on balance transfers may apply for only a few months. Of course, you can transfer your balance again and again, but be aware that opening lots of new accounts may lower your credit score.
Your retirement funds can also be used in a dire situation. If you have a Roth IRA and you're over age 59 1/2, you can withdraw your contributions and gains without any tax or penalty. If you're under 59 1/2, you'll likely pay income tax and a penalty upon withdrawal of your gains, but your contributions are yours for the taking.
A regular IRA can also work as a short-term emergency fund. You can withdraw money without tax or penalty as long as you pay it back within 60 days. If you don't, you'll be stuck with the same tax and penalty as with the Roth.
And please think long and hard before you take out a home equity line of credit (HELOC) to pay your bills. A HELOC is secured by your house. If you can't make the payments, your lender could foreclose on your home. I'd rather you get emergency cash from unsecured debt such as a credit card cash advance. Remember, these are not ideal situations but options for confronting the unexpected.
From the August 2004 issue of O, The Oprah Magazine
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