Cash will be king in another rocky year

FIND IT, SAVE IT, USE IT JOHN F. WASIK
Published: January 12, 2009

-- If you thought things were getting tight last month, get ready for the big squeeze.

While I would love to start 2009 with some rosy predictions, one theme sticks in my mind: Cash will never be more important. You need to find it, save it and use it as your cushion in what will be another rocky year.

Let's dispatch the ugliest kinds of cash-raising first. The seemingly easy money that almost anyone has access to is often outrageously expensive.

What about those checks you occasionally receive with your credit-card bills? Aren't those an easy source of cash?

Look carefully at the terms for those innocent-looking drafts. While you may be paying from 12.75 percent to 13.47 percent for charging items on most standard credit cards -- assuming you pay on time -- those "convenience" checks may nip you for at least 20 percent to 25 percent annually, according to http://www.cardratings.com.

The stinger is that credit-card checks are treated as cash advances, and you are charged interest the moment you use them and may be subject to additional flat fees.

With conventional credit cards, you typically have a grace period of 30 days before you are charged interest.

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Wouldn't it be easier to take advantage of many banks' "overdraft loans"? After all, if you exceed what's in your checking account, you are covered.

These loans also have a vicious bite, ranging from 100 percent to 3,000 percent annually, according to Americans for Fairness in Lending, a consumer group.

If you qualify, it's better to save money on finance charges by applying for a line of credit or home-equity loan from a bank or credit union.

The best cash sources won't hobble you with unsustainable debt. One of my favorites is an insurance-policy loan. This works only if there's a cash-value, whole-life or "permanent" life policy in your name. Provided your policy has a "cash-surrender" value, you can borrow against that amount.

Say you borrow $40,000 against a policy that has a $100,000 value. You can either pay it back at a rate of 5 percent to 8 percent or not at all.

Choosing not to pay back the loan will reduce the policy proceeds when you cash it in (another option) or die.

Keep in mind that if you take out too much money from your whole-life policy, you risk losing coverage. Do you still have dependents who will need income if you die? Consider cashing it in and buying a low-cost, term-life plan.

. . .

Speaking of cashing something in, are you tempted to tap whatever is left in your retirement account? Cashing in your 401(k)-type plan or individual retirement account will hurt you for a long time because the older you get, the more difficult it is to rebuild savings.

Even if you take out a loan from your 401(k), you have to pay it back in full if you change employers or lose your job. Otherwise, you will pay income taxes and a 10 percent penalty if you are younger than 59½.

Although I'm loath to say this, it's better to reduce or stop your retirement-fund contributions if you need more cash in your paycheck. But as soon as you are flush again, restore your contributions in full.

You also can dig into your safety-deposit box for some more idle sources of cash. U.S. savings bonds that have reached their maturity date can be redeemed at full face value. Several types of older bonds may not be paying interest anyway.

An even better cash source may be your own family. Parents and grandparents can give as much as $13,000 per person each year without paying gift tax to the IRS.

Those who provide cash can avoid the gift tax altogether if they pay bills directly. This often works well for college-tuition payments.

One last stop in your cash roundup: Your worldly goods are worth considering.

Ready cash will be a faithful friend in a pinch this year, but you may need to do some digging to find it.
John F. Wasik, author of "The Merchant of Power," is a Bloomberg News columnist. The opinions expressed are his own.