Five Ways to Free Up Cash When You Have Little in the Bank

Cash is king. During times of uncertainty, having cash on hand can make the difference between financial stability and the host of issues that come with insolvency. That’s why regardless of your current financial situation, having cash options can not only help keep you solvent, they can also ensure that you stay on track right toward your crucial life goals. So, what can you do to raise cash if you have little money in the bank?

 

Without a doubt, there are many tools and techniques that you can utilize to generate cash and boost your emergency reserves. Today, we’ll outline five practices that you can apply to come up with a few hundred or a few thousands of dollars when you need it. It’s crucial to note that each option has its own set of benefits and tradeoffs. Even so, keeping track of the resources available to you before you need them can help ensure that your finances stay on track, no matter what issues life throws your way.  

#1 Cut Back on Non-Essential Household Spending

One of the quickest ways to come up with cash is to cut back on non-essential household spending. For many, this suggestion seems like a no-brainer. Yet more often than not, this challenging yet straightforward approach is often one of the most underutilized ways to raise extra cash. Certainly, finding a tradeoff between consuming today and saving for tomorrow is hard. So, where should you begin?

To start, you’ll want to get a sense of trends in your monthly household spending. To do this, begin by pulling up two months of your latest bank statements. Then go through your expenses, item by item, categorizing each as either essential (like housing, utilities, personal care) or non-essential (like takeout, app subscriptions, shopping). Then, tally up the non-essential items and decide what you can do without for a season while you come up with needed cash and make a plan for reducing these expenses.

Certainly, there are more streamlined methods for this approach. Apps like Mint and Quicken make it easy to link your bank accounts electronically, identify spending categories, and create a budget on the fly. However, the point here is to become accustomed to the way that money is entering and leaving your bank account each month to identify savings opportunities more clearly. To be sure, it’s crucial to look at each individual expense to identify opportunities, rather than relying on generic spending categories offered by these apps.

Whichever method you choose, be sure that you’re comfortable with how you go about cutting expenses. Dieting research has shown that sudden changes in eating habits often trigger a stress response that can lead to a crash diet. And that’s why any changes to your financial spending should be done in a stepwise and systematic fashion. And while budgets are an essential part of a solid financial plan, the approach we’re advocating here is short-term adjustments to address an immediate cash need, rather than a long-term lifestyle change.

#2 Reduce your Debt Service Costs

Another approach to coming up with extra cash is to reduce the number of debt accounts that you service every month. On average, Americans carry credit card balances of $6,200 and make minimum payments of $120 per month. Volumes have been written about the dangers of consumer debt and the cost of carrying credit card balances. Indeed, eliminating credit card debt is one way to free up extra cash for the long term.  

And prioritizing debt repayment, paying down smaller accounts first, and refinancing are some ways to grow money in your bank account. Let’s start by taking a look at paying down your debt.

Make a Budget, Prioritize Debt Repayment

What gets measured, get managed. As mentioned earlier, knowing where your money is going every month can help you identify ways to reduce or eliminate spending and free up cash. You can multiply this effect by using this freed up cash to eliminate credit card debt and thus giving your financial savings another boost.

How does it work? Well, this approach includes reallocating spending away from non-essential matters and toward making extra debt payments for a time. Again, like a diet, this method requires commitment. Yet, the short-term sacrifice of prioritizing debt repayment could lead to a lifetime of financial gain.  Where should you start?

Pay Down Smaller Debts First

Consider focusing your efforts on paying off your smallest balances first if you have multiple credit cards. To be sure, prioritizing the elimination of your lowest balances can help free up cash from those payments to be used toward your next higher balances.

Here, the idea is to quickly pay off debts with low balances and then apply the extra monthly cash flow to pay down your next smallest account balance, repeating until your credit cards are completely paid off.

Consider a Personal Loan

Another thing to consider is that interest rates have fallen considerably over the past year. With personal loan rates well below 10%, refinancing higher interest credit card debt might help lower your monthly payments. You can then use the money saved on your monthly payments to pay down your loan faster. How so?  Let’s look at an example:

Assume you have an outstanding credit card balance of $10,000, for which you are charged an annual percentage rate of 21%. Making the minimum payment of $200 per month would take roughly ten years to pay off your debt. Now, if you refinanced into a fixed-rate 10-year personal loan at 7.5%, your payment could be as low as $118 per month. Applying the extra $82 per month toward your principal amount could lead to your account being paid off five years sooner.

While not necessarily a short-term fix to coming up with cash, the process of reducing credit card debt can help you identify ways to trim expenses, eliminate one more financial burden, and put you on track to building emergency reserves for the long-term.

#3 Judiciously Tap Your Home Equity

Now for many people, a home will be their largest lifetime purchase and source of wealth. A time will come when you have little choice but to borrow money. If you own a home and have a sufficient amount of equity, some lenders may allow you to borrow against your home. You’ll have to choose between a home equity loan or a line of credit in this situation. 

 

What’s the difference between the two? Well, a home equity loan is a fixed-rate loan, paid off over a set time. On the other hand, home equity lines of credit are like a credit card whose rate and repayment period can fluctuate over time.

 

When should you borrow against your home? If you plan to sell your home soon and need a way to raise some extra cash, borrowing against your home equity might make sense, assuming stable price conditions in your local real estate market. While you should find ways to reduce non-essential expenses and raise cash first, borrowing against your home equity can be cheaper than using a credit card. Now, here’s a word of caution against using home equity loans or lines of credit.

 

Borrowing against your home’s value can help you meet near-term financial needs but should be done so judiciously. Borrowing against your home during a time of financial stress can put you and your home on the line. For example, a bank can force a foreclosure if you stop making regular payments on a home equity loan or line of credit. Therefore, taking on additional debt during a period of financial stress might lead to losing your home. This is one reason why borrowing against your home to come up with extra cash comes with its own set of risks.

#4 Relocate to Lower Your Housing Expense

If your cash need extends beyond addressing non-essential spending or borrowing prudently just won’t cut it, then it might be time to reassess your current living situation. For many people, housing can make up between 30-50% of their overall monthly expenses. And moving to a lower cost part of town or state to reduce this expense is one way to free up extra cash. 

 

This trend is evident today in stories of Silicon Valley tech workers abandoning high cost rents of the San Francisco Bay Area, for more affordable options in places like Austin, Texas. So, what are the financial benefits of relocation?

 

Right off the bat, moving to lower your housing expense might enable you to finally accumulate savings that can later be used to pay for unexpected costs. At the same time, reducing a large part of your housing expense can give you more lifestyle flexibility compared to cutting back non-essential spending altogether.  

 

In fact, while reducing non-essential expenses can work in the short term, like dieting, your spending is largely determined by your lifestyle priorities. That’s why reducing housing expenses can set you up for a long-term gain without having to sacrifice the things that are important to you today. And if you own a home and have built up equity, then you can use that cash as a way to pay for significant one-time expenses if you decide to purchase a cheaper home in a more affordable part of town.

 

The downside of this approach means moving. Besides paying for boxes, packing supplies, and movers, there are other expenses to account for. If you’re a homeowner, you probably know that there will be closing costs associated with selling your home and again when you buy your next home. That’s why this option makes the most sense for individuals who have either 1) lived in their home for longer than five years or 2) have seen rapid home price appreciation. The bottom line here is to make sure that the savings benefits you anticipate outpaces moving costs.

#5 Access Retirement Savings Prudently

A final way to come up with extra cash is to tap your retirement savings. Now using your retirement savings to address a short-term need should always be a last resort. Fortunately, there are ways to access your retirement savings if you need cash in a pinch. While borrowing against your retirement savings is one option, let’s talk about cash withdrawals.

The CARES Act passed earlier this year allows individuals affected by COVID-19 related conditions to draw down 401k and IRA savings and in many cases do so penalty-free. Under the old rules, penalty-free withdrawals from these accounts were limited to individuals over the age of 59 ½, those experiencing financial hardship or first-time home buyers.  

What’s more, prior laws applied a 10% penalty for withdrawals on individuals not meeting these criteria. In the case of the CARES Act, you can cash out your retirement plan in a more favorable way. Let’s take a closer look.  

According to the IRS’s interpretation, the CARES Act allows individuals to withdraw up to $100,000 from their retirement accounts penalty-free. Because pre-tax money went into the accounts, money coming out will be considered ordinary income with taxes due. Fortunately, the CARES Act allows employers to forego the standard 20% estimated tax at withdrawals for 401ks and enables individuals to spread out tax payments over three years.

Just because you can take out the money doesn’t mean you should.  And that’s because taking money out of retirement savings can reduce your investments’ future lifetime growth. And while doing so might help you meet a near-term need, the cost of foregoing your savings’ future compounded growth should be carefully considered before choosing this option.

Coming Up with Cash When You Have Little in the Bank

A time likely will come where you need to raise cash to meet near- or long-term needs. Depending on your circumstance, finding extra cash may come down to simply cutting back on lifestyle expenses or tapping your retirement savings when a big emergency crops up.  

 

Either way, knowing your options and having a plan in place might help you avoid costly mistakes when your need for cash arises. Even so, keeping track of the resources available to you right now before you need them can help ensure that your finances stay on track, no matter what issues life throws your way.  

About the Author

Peter Donisanu
Peter Donisanu is Chief Financial Strategist and President at Franklin Madison Advisors, Inc. Franklin Madison Advisors is a fee-only fiduciary financial planning and investment management firm based out of Pittsburgh, Pennsylvania and serving clients nationally. We exist to serve a generation that has been underwhelmed by traditional paths to financial security and independence.