Monday, November 10, 2008

Recession-Proof Yourself: Five-Part Series

Part 1: Quick Ways to Raise Cash During a Crisis
How to Come Up with Funds for Use During Emergencies

Say the worst comes to pass, and you need cash in a hurry. It's not a great position to be in, but you don't need to contemplate knocking over a convenience store. Whether you need quick cash, to cut back on spending or unload major debt, this five-part series will help gain your bearings.

1. Create a Temporary Line of Credit Backed by Securities

The first option probably isn’t available for everyone, especially if you are just starting out, but for those who have been diligent and disciplined, the odds are good that you have built up a respectable brokerage account outside of your retirement accounts. If you’ve been at this long enough and have a decent job, it's probable that you’re in the six-figures range; e.g., a 40 year old that began investing $5,000 per year at 22 after graduating and landing his first job would have just shy of $228,000 assuming a 10% rate of return.

Were you to need emergency funds, it’s possible to temporarily borrow against your securities to create a margin loan, withdrawing the cash. This is not without risk! Not only is your interest rate floating and subject to change, but if your stocks and other investments fall below a specific threshhold, your broker could sell your assets to pay back the loan without contacting you. Many brokers will give you the courtesy of a call (known as a margin call) to deposit more funds so this doesn’t happen, but they aren’t required to do this by law. This could either lock in losses or trigger big capital gains taxes, depending upon the success you’ve had with the positions in your account. Worse yet, you have no control over which stocks are sold; that is entirely at your broker’s discretion.

A friend of mine, back in her early twenties, built the first few businesses from scratch that helped her form her current investment vehicle. She often had more ideas than available liquidity. Although her properties and operations generated relatively substantial funds, they weren’t always available at convenient times and opportunity doesn’t wait for you to come up with cash. Thus, this was a method that she was able to use with tremendous success. One of the successful e-commerce startups was funded by writing a check against an account that held some of her Berkshire Hathaway shares, enabling her to float the company its working capital until it generated the funds to repay the entire contribution (which only took a few months). The beautiful thing is that now those companies pour cash into their own brokerage accounts that have even more assets piling up for them, including shares of Berkshire Hathaway, General Electric, and other great businesses. It’s a virtuous cycle.

2. Swallow Your Pride and Get a Second Job

Sometimes the fastest and most effective way to generate immediate funds is to take on a second job. One close family member of mine found that by working the night shift at a mid-scale restaurant, she was able to generate more than $30,000 per year in tips above and beyond her day job. Her skill was connecting with people and she found a second job that leveraged that talent.

For many people, they argue they don’t have time. The Internet has changed all of that. The world is now filled with those who make thousands of dollars a year on eBay, working only a few hours a week from their homes. Creativity often pays off more than just putting in more hours, so think outside the box.

3. Take Out a 401(k) Loan or Hardship Withdrawal

This should only be done in extreme cases, but it is possible to borrow against the assets you’ve built up in a retirement account. There are very specific rules to follow or else you could find yourself paying huge tax penalties. If things should get worse before they get better, you could have inadvertantly wiped out your retirement, causing yourself much bigger financial problems down the road. For more information, see Part 2 about 401ks.

4. Redeem Your Rewards

Most of us have some type of rewards based credit card, the most popular being the venerable American Express. Over the past few years, you might have rung up some pretty hefty reward balances, especially if you pay for things such as gas and groceries on your card.

Check into your program and consider redeeming your points for gift certificates or merchandise from retailers that can free up cash. At the time of this writing, for instance, I have 114,719 points on one of my American Express cards. If I needed, this could translate into nearly $1,100 in gift certificates to Wal-Mart or Target to cover household expenses or to Brooks Brothers to buy clothes. That’s money that won’t come out of my household budget.

5. There's Serious Cash in Gold

It may seem cliché. It may seem odd. But it works. Almost every household has excess gold in the form of jewelry and with gold prices soaring for the past few years, there are plenty of businesses that are happy to take that scrap and melt it down, giving you a big fat check in exchange.


Welch Wealth Management, Leer Financial, BB&T, CUNA.

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