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Where to Go for Cash in a Pinch

Without an emergency fund, here are some avenues to pursue--and one that you should definitely avoid.

Christine Benz: Hi, I'm Christine Benz for Morningstar. The pandemic and its related economic effects have exposed, yet again, how many households are operating without any sort of financial cushion. Joining me to discuss where to turn for cash in a crunch is Michelle Singletary. She's a Washington Post columnist. And she's also the author of a new book called, What to Do With Your Money When Crisis Hits. Michelle, thank you so much for being here.

Michelle Singletary: I'm so happy to be here. Thank you for having me.

Benz: Well, I'm thrilled to have you here. Michelle, you talk about this topic in the book about how many people are operating without any sort of cash cushion, their budgets are very tight. And many people just struggle to amass any sort of emergency fund. Can you talk about why it's such a struggle? Maybe it's sort of obvious. But maybe you can walk us through why people have trouble amassing an emergency fund.

Singletary: No, think it's not something that we think we know intrinsically, because those of us who are doing well, you'd like to think that everybody did things the way you did. And the fact of the matter is, many people weren't able to build that cushion because they just weren't making enough. Now you can argue it was because of the decisions that they made. But right now, when there's a crisis, it's not the time to wag your finger at people. Now's the time to help them, and then show them a better way, which is what I hope I do in the book, which I try to do in my column, right? I fuss, but not in a sense that makes people who didn't save and have cash for emergencies feel bad about themselves, they already know the things that they didn't do. And so that's why it's important that we have empathy for people who have less.

And the pandemic showed, as many economic downturns always show, how vulnerable so many Americans are. And a lot of times, it's through no fault of their own. They have been working hard, but their wages are stagnated, they haven't been getting raises, housing is crazy in so many parts of the country. And so when you spend so much of your income on housing and healthcare, there isn't a lot left over to save. And that is really the problem. It's not because people are just sitting around deciding to buy big-screen TVs all the time. It's just that they're not earning a lot. Housing is expensive. Transportation is expensive. And healthcare is expensive.

Benz: Absolutely. For people who want to set aside some emergency reserves to protect them against unexpected job loss or big bills for healthcare or whatever else it might be, what do you think is a sufficiently large cushion? You often hear about this sort of three to six months' worth of living expenses? I think that puts some people off, because that seems like a pretty big chunk of change. So how do people rightsize that cash cushion?

Singletary: I like to think of it in stages. When you're starting out and you're not making much or your income is depressed, then you just save whatever you can. I know that you've heard that three to six months, and that should be a goal. But if you are living paycheck to paycheck, it's unrealistic. So what happens is people think it's unrealistic, and they do nothing. You've got to do something. Listen, $25 will help get you some groceries, right? You can get some eggs and milk and make some sandwiches. So every paycheck, if it's $5, if that's all you can squeeze through, make it $5. And then the next paycheck see if you can squeeze it to $10, and so on. And so when you're paycheck to paycheck or not have much, I say at least try. Try for at least one month or even half of a month. And that's a very attainable goal. At whatever level it is.

And then if you're pretty situated--you live paycheck to paycheck, but you don't actually have to live paycheck to paycheck, you just overspend--then you do try to go for that three to six months, and just start one month at a time. And if you're deeply in debt, it's going to take you longer because I want you to put more of your money to get out of debt. And so if you're kind of, you know, in that middle area, you do want to shoot for three to six months, because that's about how long it takes for you to find new employment. If you are a highly compensated individual--and lots of people like that during the pandemic lost their jobs--you need to aim for 12 months, 12 to 18 actually, because studies show in the last Great Recession, that's how long it took for people who are highly compensated to find another job at that same income level. So, you can get a job but not at that same income level. And if you've got it to be able to put aside, then you ought to shoot for the moon and have at least 12 months. So just decide, "Where am I and how much can I peel off to save for cushion?" Because you must have some kind of cushion no matter where you are on the income spectrum.

Benz: One thing you addressed in the book was where to turn if you have exhausted your cash reserves, you've spent through them due to some sort of financial emergency or job loss. What's sort of the next-line reserves? Can you walk us through the least bad choices? If I have, say, maybe retirement accounts? Or maybe I have a health savings account? What should kind of the hierarchy be for me in that situation?

Singletary: Obviously, an emergency fund, if you have it, I hope you do. So, you go through that, that's what you saved it for. And then, you know, it just pains me to say this, but I'm a realist. If there is no other source of money, and you've got to do what you got to do, then you do tap your retirement account, if you have to. If you've got a Roth, it's a much easier to tap that, your 401(k), or TSP. And then here's what you do: If you have to tap it only take out as much as you need short term, because I've heard people say, "Well, I'm going to take out three or four months' worth." Maybe they feel like it's easier to do that. But the way things are set up now, it's very easy to go back in if you need more money. So, just take out what you need as you go along, maybe even one month to one month. It's a little bit more paperwork, and so forth. But I don't want you to take out more than you need, and then having to pay taxes on it. And if you're under 59 1/2, have to pay that 10% penalty. And so that's the pot of money.

And then after that, OK, maybe you've got to put some things on a credit card. I get it, I understand it. The thing that should be last--and I just really would hope that you just ask everybody and their mama--is payday loans, auto title loans, any of those types of borrowing because it just puts you into a cycle of debt. And you basically pledge your next paycheck, if it's a payday loan. If it's your car, you put up your car. And I've seen studies where people put up a paid-for car, and only owe like maybe a couple of thousand dollars, but the car is worth 10 or 15, and they lose the car. So stay away from those. That should be the last, I mean, not even the last resort. I hate to even mention it, please just don't go there if you can.

And really, even between emergency and retirement fund, ask folks. People sort of think people always have their hands out. But it's very difficult to ask people for help. But I would rather you do that before you tap your retirement fund, because you'd be surprised how many people might be willing to help. So, maybe aunty can help you with your utility payment, maybe grandma can help with your car payment. You just contact them and say, "Listen, I lost my job. It's really tough. Could you help me out for a couple of months? So and so is helping with this, can you help me with this?" And if you're on the receiving end of that request, please say yes. If you can afford it from your extra, give from your extra. And then pay the people directly. We helped my sister, who lost her job because of the pandemic. And my husband and I paid her rent for a couple of months. We called the rental office and made sure what the amount was, made sure how we could pay it. Not that I don't trust my sister. But it's the prudent thing to make sure the money is used for what you intended for it to be used. So pay the utility company directly. Say, "Hey, what's your bill? What's the number I could call?" And you call them and make the payment and that way, you're not giving it to the person, but you also are giving them a relief.

Benz: That's good advice. I wanted to know how you feel about home equity, tapping home equity. We've seen home prices appreciate, as you alluded to. How should people approach that? We saw people get themselves into a lot of trouble with overtapping home equity. That led to the last financial crisis, arguably. How does that fit in?

Singletary: I think that's sort of towards the end of the line. And oftentimes, if you've already set up the line of credit that you can pull from, but if you've lost your job, obviously it's not going to happen. I think of home equity as a last-resort pot of money. When people ask me, I say the only thing you really should be using that for is if you've got a major home repair that if you don't do would damage your home. Like if you've got a major roof issue, I need you to fix your roof because it will create more problems. And if that's the only pot of money that you can draw from, I'd rather you draw from that than your retirement account, right? Because then you've got, you know, taxes and so forth. So, it's sort of wedged in there between retirement and savings, and certainly credit card debt. But generally speaking, I think of home equity as, you know, don't touch it unless it is a dire emergency to upkeep your house.

Benz: OK, Michelle. It's great to get your perspective. Congratulations on the book. And thank you so much for being here.

Singletary: Thank you.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.