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It doesn’t take a catastrophe to experience a temporary cash crunch. Moving or switching jobs can sometimes cause serious, if short-term, liquidity issues, with financial outflows sometimes hitting your wallet before it is replenished by new money coming in. And sometimes even the recommended rainy-day fund of three to six months worth of living expenses isn’t enough to cover a sudden, emergency expense.
So what are the best and worst ways to get money quickly when you need it? Global News put that question to David Gowling, senior vice president at debt consultancy MNP in Burlington, Ont., and Scott Hannah, head of the B.C.-based Credit Counselling Society. Here’s an amalgam of how they ranked the available options:
Unsecured line of credit
A line of credit works a bit like a credit card. It allows you to borrow money up to a pre-set limit, but you don’t have to use the loan until you need to and then you only have to repay the amount you borrowed. Unsecured means your financial institution is lending you the money without using assets, payday loan bad credit North Carolina such as your home or car, as collateral. For many Canadians, unsecured lines of credit come with a reasonably low interest rate (think 5-7 per cent), zero fees and fast set-up, which is why both Gowling and Hannah put it at the top of their ranking. You can often borrow as little as $5,000 and up to several tens of thousands of dollars with an unsecured line of credit, which makes it a good option for emergency home repairs like fixing a leaky roof.
One of the downsides, however, is that minimum payments on lines of credit are often interest-only, which means your debt will become permanent if you only have the budget to repay the minimum, Gowling warned. Another potential drawback is that relying on lines of credit is so easy that it can quickly become addictive, he added. Over-reliance on lines of credit can be a slippery slope into unmanageable debt problems, which is why many debt consultants advise against relying on lines of credit as a substitute for having an emergency fund.
Also, “those with limited income or a less-than-perfect credit score may have trouble accessing this type of loan,” Gowling said.
Tax-Free Savings Account
A Tax-Free Savings Account (TFSA) is where a lot of people store their emergency fund because any money sitting there grows tax-free and can be withdrawn at any time with no cost. If you have a plump rainy-day fund in a TFSA and your furnace goes bust or you lose your job, we don’t need to tell you what to do. And any money you take out frees up contribution room, which you can start filling the following year.
The case for tapping your TFSA, however, becomes less clear-cut if you’re using the account to save for retirement. For Canadians with limited income and in a number of other cases, TFSAs can be a better way to save for retirement than a Registered Retirement Savings Plan (RRSP). If the TFSA is the home of your nest egg, it may make sense to tap a line of credit instead. If your money is invested, your annual rate of return may be higher than the interest rate you’d be paying on a loan and you may not be able to turn those investments into cash without incurring steep costs, Gowling noted.