Raising Extra Cash
The info on this page can be condensed into one sentence:
Before buying an investment, find out about cashing it because there will be a day that you will want to raise cash for any number of reasons.
Borrow Money or Sell Assets?
For many people, being short of cash is chronic. But we assume here that an investor is usually able to keep expenses under control. Yet, no matter how carefully one plans, sometimes you find yourself needing to raise cash. Only a reckless person assumes he or she will never face this.
A person with no financial assets has only one option for raising cash: borrow, probably paying a high interest or service charge. But a person with savings has more choices including selling or redeeming some investments. Borrowing when you have some investments as collateral lets you borrow at less expense than the person with no savings.
Life Insurance Policy: Borrow Against or Surrender?
Suppose a woman has put all her savings into a life-insurance policy with a cash surrender value. If she surrenders that policy, then when she is ready to replace it she will have to pay the company’s heavy sales load all over again, and maybe she will be penalized further in her physical examination. Generally, she is better borrowing on the old policy.
All Assets Are Common Stock
Suppose an investor owns nothing but common stock. The stock prices could be so low when he needs cash, he hates to sell. Instead of selling, he could use stock as collateral for a bank loan. A well-balanced investment potfolio would avoid this problem by having some of the capital in a fixed-dollar investment, cashable without loss.
Borrowing For a Large Purchase
Borrowing can enable a saver to make a worthwhile investment that is otherwise impossible. Especially in buying a home, borrowing can be the only option. The cost of a house is so large that even if a person could pay cash, it would probably be unwise to put so much capital into one investment at one time.
Borrowing Against a 401(k)
Though 401(k) plans generally allow you to borrow against your retirement savings when you absolutely need to, this is often not wise. Here is one article on the subject:
Warning: 401(k) loans are hazardous to your wealth. Search Google in the search box at the top of this page for additional articles on the topic.
Borrowing Pitfalls
Suppose an investor wants to buy corporate stock he thinks will rise rapidly in price. By borrowing, he can buy more of that stock. The interest expense will be less than the expected increase in stock value.
This is a fine scheme when everything works as planned. Suppose this common situation: the value of the stock goes down, not up. The borrower may be forced to sell all the stock,
and find cash elsewhere to pay off the balance of the bank loan. The larger the loan compared to total stock value, the greater the risk.
Of Historic Interest: During the great stock market boom in 1928 and 1929, a speculator could buy stock by paying cash for only 10% of the cost, borrowing the other 90% from the broker. When stock prices dropped only moderately, he owed the broker more than his stock could be sold for, and he was forced to sell out. Each of these distress sales tended to pull down market prices and, in turn, to force other borrowers to sell. This lasted from late 1929 until early 1933. During the collapse, an investor who owned stock free of debt, and hung onto it, did not necessarily lose anything, because in a few years stock values and dividends rose again to reasonable levels.
Borrowing & Risk
Thus, borrowing can be profitable, but it increases the risks in investing. If you want no unnecessary risk, plan your investing so that you always have something you are willing and able to sell or redeem if you need cash. Then if you run into such serious difficulty that you need extra cash, you can borrow as a last resort.
Consider the Need to Raise Cash Before Investing
When a family buys clothing or a refrigerator, they ordinarily expect to use the item until it is worn out or obsolete. They have no reason to consider whether the item is easy to resell. But when a family buys an investment, even though they expect to keep it for the long-term, they have no way of knowing whether, or when, they may want to sell it. Some day they may be short of cash and will have to sell some principal. Or sometime they will want to switch to a new investment that looks better than the old one.
Before investing, be able to answer this question: “Can I resell it easily, quickly, at any time?” In other words, is it liquid, always readily marketable? If on some of investments the answer is “No,” then you need to have other investments that can answer “Yes.”
Bonds
Probably the most perfectly cashable of all investments in this country is a savings bond of the U. S. Government, especially the Series EE bond. No matter how bad conditions may be, the Government does not reserve the right to delay payment.
You can cash your EE Bonds and Savings Notes at most local financial institutions. An owner merely has to provide ID, and in a few moments he has the cash. An EE bond is practically as liquid as currency in your pocket, and with interest added. More info is at the
official US Treasury site.
On other bonds, including U. S. Treasury bonds, the issuing government or corporation has no responsibility for redeeming until the maturity date.
An organization issuing bonds may have a high credit rating, but one of its bonds may still be quite difficult to sell, because no one wants to buy that specific bond. When an investor is about to buy a bond, little thought is generally given to the possible difficulty of reselling. An amateur buyer often learns the hard way, by personal experience.
But when an investor must raise money, he is much better off if he owns a bond he can sell at a sacrifice rather than one that nobody wants to buy at any price.
Banks & Savings Institutions
Money deposited in a checking or saving accounnt in a bank or savings institution can usually be obtained easily.
However, for certificates of deposit (CDs), withdrawals before maturity ususally have a substantial penalty. Banks can set their own penalty and there is no limit on the amount of penalty. If at all possible, it is in your best interest to wait until a certificate of deposit matures before withdrawing the money.
Please be sure to read about Safety of Banks & Insured Deposits for a number of issues about bank deposits and why I used the word “generally” above.
Selling Stock
For corporate stock or any equity with a variable market value, sale-ability has two angles
- Is the stock marketable? or, “Can I sell it readily, when I need to?” Some stock may be difficult to sell at any price. This situation is the same as with some bonds discussed above.
- “Will I be willing to sell stock when I need cash?”
Can I Sell The Stock When I Need To?
Choosing a stock that will sell readily means making sure that the stock has a regular market.
One way to check if it has a regular market is to check if its price is printed frequently in some publication. Because of the ease of getting stock data online, any one stock can appear to have a market. However, when you look up quotes in a newspaper, you are getting only the most widely traded stocks. Keep in mind that not all newspapers print stock prices these days. The ones that do might print only those listed on exchanges. Wall Street periodicals give prices on still more stocks including stocks sold over the counter, not listed on an exchange.
Ignoring the question of price, many issues of corporate stock are just about as marketable as a savings bond.
Will I Be Willing To Sell Stock When I Need Cash?
When the current price of stock is high, the main objection to selling might be the income tax on the capital gains. While paying a tax is always unpleasant, it is generally not a good reason to refuse to sell at a good price if the owner needs cash. But when the current price of stock is low, selling can mean a big sacrifice.
An investor cannot forecast where the stock market will be in the future when he or she needs extra cash. But the need for cash is more likely to arise when stock prices are low. The same economic decline that causes the stock market to drop can also cut salaries or cause layoffs and job cuts.
Selling Mutual Funds
With an open end mutual fund, the mutual fund stands ready to redeem the shares it issues. The redemption value is figured automatically on the combined value of all the stocks and other assets the fund owns. If the share value in a broadly diversified mutual fund is disappointingly low, it is because general stock market values at that time are down. Also, a mutual-fund portfolio, because it is diversified, does not drop in value as much as do some of the individual stocks included in its holdings.
A balanced mutual fund has part of its assets invested in bonds or preferred stocks or both. The remainder is invested in common stocks. This causes the value of a share issued by the fund to fluctuate less than in a fund whose portfolio holds only common stocks. When general stock market values drop, the share value in a balanced fund does not drop as far as in a common stock fund. But on this point, a fixed-dollar investment with genuine insurance is better than a fund containing any stock at all.
For more info see
How to Buy & Sell Mutual Funds and
about mutual funds on this site.
