So your mortgage payment just ratcheted upward or an unforeseen event has shot the heart out of your finances. Don't succumb to money melancholy just yet.
In the grand scheme, you might have serious credit problems you need to reconcile with due haste. More immediately, what you have is what high-finance types call a cash-flow problem — not enough income and reserves to cover your monthly expenses.
Before unloading your house on the cheap to avoid foreclosure or hitting your doctor up for a Prozac prescription, consider that many Americans have tens of thousands of dollars in assets and $1,000 or more in potential monthly income and savings they often don't realize are readily available to them.
"There are many steps you can take to improve your cash flow," says David Yeske, past president of the Financial Planning Association and a principal with the San Francisco-based firm Yeske Buie. "You just need to take a hard look at your options."
What follows are 10 ways to raise significant sums to overcome a sudden shortfall. Some involve sacrificing your future financial security. Others require eating a bit of humble pie — but at least you'll be able consume it in your own home's dining room.
Many of us are sitting on tens of thousands of dollars in retirement and college savings that we can access with minimal or no tax consequences or early withdrawal penalties. Past Congresses made these allowances to help middle-income Americans get through hard times. These are sound ways to tap your long-term savings:
Roth IRAs: Because these accounts are funded with after-tax dollars, all contributions can be withdrawn freely at any time. Contributions made by converting a traditional IRA to a Roth can be withdrawn if held in the account five or more years. Conversion contributions less than five years old will be subject to a modest 10 percent tax for early withdrawal. Avoid pulling out earnings because they're subject to both income tax and the 10 percent levy. That hit could approach 50 percent of the withdrawal, depending on your tax bracket and state and local income-tax rates.
529 College Savings Plans: You can withdraw funds you contributed with after-tax dollars to these accounts with potentially minimal tax consequences. The withdrawn money will be reported to the IRS on a proportional basis, as principal and earnings, depending on the account's performance. For instance, if your contributions produced a 25 percent return and you take out $10,000, then $8,000 will be tax-free and the $2,000 representing the gain will be taxable. At worst, you may owe up to $1,000 on that amount, so you reap $9,000 or more from your $10,000 withdrawal. If the account's earnings are much greater, this is a less attractive source to tap. You should not take out any contributions made by others such as relatives. And 529 accounts set up under the Uniform Gift to Minors Act are not accessible.
Halt contributions to 401(k) and 403(b) plans: Many people overlook the fact they can suspend contributions to these employer-sponsored retirement accounts with their very next paycheck, Yeske says. Get yourself to HR and cancel these set-asides for the future — but restart them as soon as you can after your crisis has passed.
401(k) and 403(b) loans: Many employers allow general-purpose loans from these savings plans. Such loans typically must be repaid within five years. The upside is the interest you pay on the loan goes into your account, along with your replenished funds. Just be sure to deploy the money strategically to get through your cash crisis and not fritter it away.
If you're really strapped and must withdraw money from your 401(k), 403(b) or tax-deductible IRAs be prepared to face that severe tax bite of up to 50 percent come filing time. If you hold off until this Jan. 1, you at least won't have to square up with the IRS until April 2009.
If you don't see your financial situation improving in the coming year, this move is strongly ill-advised unless you put aside the taxman's due in a lock box.
If you're sure it's impossible to get your income and expenses in line, think again. Many people can add $1,000 or more to their monthly income with minimal sacrifice. And since that's after-tax money, it represents about $1,500 or more you can put toward your mortgage, since your higher interest cost is tax deductible.
Adjust your payroll-tax withholding to account for an increased mortgage payment. If your payment jumps $600 a month due to an interest-rate hike, that's all deductible and will give you an additional $7,200 tax write-off for a full year. That's a roughly $1,800 to $3,000 annual tax break — depending on your bracket and state and local income taxes — which means you could safely reduce your withholding $150 to $250 a month and boost your take-home pay that amount.
Adjust your tax withholding to stop overpaying if you typically get a filing refund. The IRS reported in April that refunds issued this year averaged $2,394. So taxpayers on average give the feds an interest-free loan of $200 cash a month. Since our tax exposure changes from year to year, Brian Pon, a tax adviser with Berkeley, Calif.-based Financial Connections Group, recommends consulting your tax preparer to determine how to bring your withholding in line with your anticipated liability.
Take a second job and send teenagers out to work. It seems like an obvious move, but many people under severe money stress freeze up like a deer caught in headlights and get run down financially. With the U.S. unemployment rate still below 5 percent, part-time positions are plentiful in most all job markets. The pay may be modest, but the added income could prove invaluable to your financial survival.
Sell your late-model car and buy a reliable older one. If you have an auto loan costing $350 a month (or worse yet, two loans), you could apply the difference in the price you get for your car and the balance you owe to the purchase of an older vehicle, many of which now still look good and perform well with 100,000-plus miles. Not only will you eliminate the monthly payment (which could cover a $500 jump in your mortgage payment due to the tax deduction), you also could drop collision and comprehensive insurance required by auto lenders if you can bear that risk, saving perhaps $50 a month more. If you own your late-model car outright, bank the money you raise after buying an older one and draw off it to steer through your cash-flow squeeze.
Get rid of your cell phones, high-speed Internet access and cable or satellite TV service. There was a time not long ago when we lived without these pricey nonessentials, for which many Americans pay $250 a month or more. If you're locked into a cell-phone contract, don't renew if it's soon to expire. If not, bite the bullet and pay the early-termination penalties. As for an Internet connection, default to a $9.95 a month dial-up plan until your fortunes improve.
Increase your insurance deductibles. Many auto lenders allow borrowers to maintain collision and comp deductibles of up to $1,000. And many mortgage lenders permit deductibles of $3,000 to $5,000 on homeowners insurance. You assume greater out-of-pocket risk, but you could save $100 a month or more by raising your deductibles.
Of course, the most immediate boost to your cash flow will come from curtailing your spending. Due to our vast use of hastily grabbed credit and debit cards to make purchases these days, Yeske says, many of us don't realize how large a percentage of our spending is a matter of choice and not absolute need.
"Few human beings are mentally and emotionally wired for budgeting because it requires a high level of concentration to track expenses, dollar-by-dollar, on a daily basis," Yeske says. "But just keeping a sustained focus on your spending can do your cash flow a world of good."