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Finding cash in an emergency: the good, the bad and the ugly

Times are tough for Canadians from coast to coast. As we find our way through this state of emergency, many ordinary people find themselves without clients, without hours, and without jobs. 

But the rent is still due and so are the bills. So let’s not dwell on the problem and get straight to the solution. 

When you need money in an emergency, there are lots of places you can find it. Here’s where to go searching, in order from best to worst.

Check out the guide to COVID-19 – Personal finance during COVID-19

Good ways to find money in an emergency

Here are some suggestions for finding money in an emergency that might pose as beneficial options for the time being.

Find a job in the meantime

Many businesses are currently hiring to handle the extra demand created by the developing situation. Recently, I spoke to a woman who was laid off from both her two jobs as a server and child-care provider. She found part-time work at Costco helping to manage the flow of customers in support of social distancing. Amazon, Walmart and others have announced their intention to hire thousands of employees.

Other companies are looking to backfill positions vacated by people who have had to take time off to care for children or family members – temp agencies will be filling a lot of these jobs.

Long story short, if you’re willing to go to work and roll up your sleeves, there are currently opportunities to help your community and earn some money.

Fire up your side hustle

Right now, there are lots of people in need of various services. If you already have something you do on the side, use this as an opportunity to do more. If you don’t have a side hustle yet, think about what you can do to help the people in your community that you might be able to get paid for.  Many people are signing up to be drivers for Amazon, Uber Eats, and Instacart among others.

There are other side-hustle options, like running errands for seniors and vulnerable people in their neighbourhoods. Grass will soon be growing and need mowing. Find a way to (safely) create value for your neighbours and see if you can make money doing it.

Take advantage of employment insurance

The federal government has announced new measures that will make it easier to access employment insurance benefits if you lose your job to the COVID-19 pandemic. You’ve been paying into it for all these years; don’t be afraid to make a claim when you need to.

Raid your emergency fund

We’ve long heard the advice that you should save a significant amount of money in an emergency fund. The longstanding suggestion has been to sock away 3-6 months of salary.

If you have cash saved in a high-interest savings account or tax-free savings account (TFSA), this is the time to use it. It might be painful to dip into the fund you worked so hard to save, but that’s why it’s there. Your reward for past scrupulosity is comfort in times of adversity.

When income falls short, your emergency fund is the best and least expensive source of money you have access to, so don’t look to other options until you’ve used it up. 

One caveat to this: If your TFSA mostly comprises investments, don’t liquidate it just yet. More on why not to cash out your investments below.

Borrow from your Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) allows you to borrow money when you need it, using your home as security. The minimum monthly payment is just the interest accrued, and you can access as much or as little money as you need when you need it. Interest rates are low and could drop further, making this a very attractive option for borrowing money in an emergency.

The downside to this option is that you need to have set it up in advance. If you don’t have a HELOC already (or you don’t own your home), you’re out of luck.

Borrow from an unsecured line of credit

Unsecured lines of credit have stricter repayment terms than HELOCs and higher interest rates. But they’re also an acceptable source of money if you need to cover a shortfall. Especially since interest rates are so low, this is your next-best way to borrow money after a HELOC.

Unfortunately, just like with a HELOC you will need to have a line of credit established already. Lenders want to see that you are able to repay the money you borrow, and that’s difficult to do when you’re out of work. 

Cash out your GICs

Guaranteed investment certificates (GICs) are investments that pay a fixed interest rate over a fixed term. You’ll have to wait for them to mature, but now may be the time to think about converting your GICs back to cash. If your GICs are set up to automatically re-invest on maturity, talk to your provider about changing your preference to pay out your matured GICs to a high interest savings account instead. Alternatively, you might want to use a short-term GIC ladder to get a balance of relatively high savings rates and ease of access to your money.

Even if you’re not at that point yet, you might want to look into this sooner than later. If you do need the money, you’ll have easier access if it’s held in cash instead of GICs. If you cash out your GICs and don’t end up needing the money, you can put it back into GICs when things go back to normal.

It is important to check with the GIC issuer about any GIC withdrawal penalties that may be associated with your investments.

The exception to this advice is if your GICs are held in a registered retirement savings plan (RRSP). More on that below.

Bad ways to find money in an emergency

The options for finding money in an emergency listed below are not ideal and should generally be avoided.

Run a balance on your credit card

Credit card interest rates are high, and they’re not going to come down with the Prime Rate. Typical rewards credit cards have interest rates in the neighbourhood of 19.99-22.99%. That means a balance of $1,000 carried for 30 days will cost you up to $18.90 in interest. Carried for a year, it’ll cost you $229.90.

There’s some silver lining though. Many banks are now offering the ability to temporarily defer minimum payments and reduce interest rates, which can offer some short-term relief if you do need to rely on a credit card. Log in to your online banking profile or contact your bank over the phone to find out if you’re eligible to receive support.

If you must carry a balance on your credit card, make it your first priority to pay off as soon as you have income coming in again. And try to use a low interest credit card instead of a rewards card, if possible.

You might also gain a short-term reprieve by taking advantage of a balance transfer option. If you have one credit card with a balance and another you barely use, you might be able to transfer the balance with a favourable interest rate for a limited time. Watch out though, these offers usually stipulate that if you don’t pay off the balance transfer in full on time, you owe all the interest going right back to when you first transferred the balance. Transferring a credit card balance without a solid plan for how to pay it off on time is a good way to waste a lot of money.

Borrow from family and friends

A sure way to destroy a friendship is to borrow a substantial amount of money from a friend. Even family members can hold grudges and perceive your spending habits as disrespect for their charity. 

If you must borrow money from a friend or family member, do yourself a favour and make the terms crystal clear – preferably in writing. Agree to how much will be borrowed, how often payments will be made (and for how much), whether any interest will be paid, and what recourse the lender has in case you can’t pay them back per the agreement.

Having this written down will help prevent squabbles and unreasonable demands for immediate repayment. If there’s a problem that gets escalated to small claims court, having even a rudimentary contract will help keep everyone honest.

Cash out your investments

Times like these make it particularly tempting to cash out of your investments for two reasons. The stock market has completely tanked and cashing out now will satisfy your human instinct to avoid losing what you have. And, cashing out conveniently provides some capital to get you through a time of uncertainty and underemployment.

The problem with this strategy is that investments are currently on sale for a deep, deep discount. And cashing out now means you will never get back the money that you had earned before your portfolio lost value. Recently, I wrote an article sharing my personal views on investing in a recession.

If this downturn behaves like recessions past, the markets will, sooner or later, return to where they were at the beginning of this year and go on to new highs.

If you can stomach it, leave your investments where they are and find another way to get cash.

Terrible ways to find money in an emergency

There are two means of finding cash in an emergency that should be avoided at all costs: Withdrawing money from your RRSP and taking out payday loans. If you were considering either or both of these options, it’s very important to understand the implications that follow with these methods of finding money.

Withdraw money from your RRSP

Your retirement fund is for your retirement. Don’t cash in your future to cover what is hopefully a short-term setback. There are two important reasons why.

First, when you make an RRSP withdrawal, you don’t get the contribution room back. That means the cost of withdrawing from your retirement fund is equal to all of the interest that money could have earned between now and when you stop working on purpose. 

Second, when you withdraw money from your RRSP, it’s taxed as income. The idea is you contribute when you make a lot of money and save the tax. Then, you withdraw when you don’t make a lot of money and pay tax on a much smaller income.

If you think you’ll be back to work this year and will end up making a decent amount of money, your RRSP withdrawal will raise your overall tax rate and net you less money than you think you’re getting.

Take out a payday loan

If you have a steady source of income, even if it’s part-time or temporary work, you can probably qualify for a payday loan. But that doesn’t mean you should take one out. The disclosure from one of Canada’s largest such lenders shows that in Ontario, borrowing $500 for two weeks costs $75 in interest – equal to an annual rate of 391.07%. British Columbians pay the same APR for payday loans with slightly different terms.

The trap of payday loans is that if you can’t repay the advance, you can usually just pay the interest to extend the loan for two more weeks. If you keep doing that for three months, you’ll pay more in interest than you borrowed in the first place.

Don’t take out a payday loan, and learn how to avoid payday loans in the future.

The bottom line

When times are tough, you need to be strategic with your money. Ideally, you’ll use your wits and creativity to replace at least a portion of your income, be it through a part-time or temp job, side hustle, or employment insurance.

If that’s not an option or you still fall short, look for money in places that will cost you the least in the long run. Your emergency fund (such as cash held in a high interest savings account or tax-free savings account) should be your first stop, before secured and unsecured lines of credit and fixed investments like GICs. Don’t feel like you need to protect your emergency fund like it’s your child. Your reward for your hard work in saving it is your comfort when you need it.

Other sources of money like credit cards, cashing out your retirement fund or investments, and resorting to payday loans, should only be used as a last resort. The hard times could last a while, but if at all possible, don’t sell out your long-term wealth to get through a short-term setback.