Helping clients in a cash crunch

Helping clients in a cash crunch

Helping clients in a cash crunch

Ideally, clients should be financially prepared for everything; that means having a healthy-enough portfolio of assets and income to cover all debts and expenses, and then some. But that’s not always possible. Emergencies are likely to happen, and usually they would involve shouldering larger-than-average cash expenditures.

In such situations, there are several courses of action to explore. “Those clients who have investments held outside of retirement plans (such as stock or mutual fund shares) should check their cost basis,” advised Kevin McKinley, principal/owner of US-based McKinley Money LLC, in a piece published on WealthManagement.com.

McKinley noted that positions with unrealized losses represent an opportunity. Not only can clients raise the cash they need from selling such investments, but they can also use the realized loss to offset taxable income or realized gains incurred in the current year or in the future. To mitigate the possibility that the tax-deductibility of the loss gets disallowed, there should be a gap of at least 30 days between the liquidation and the purchase of the position.

Another option, particularly for desperate times, is to momentarily set aside any aversion to debt. Paying interest for a little while, McKinley noted, could buy time to determine the most optimal long-term solution to cover any large expenditures.

“They should start by borrowing against any accumulated home equity, via a fixed-rate loan or home equity line of credit (HELOC),” he said. Aside from a relatively painless process, he said the right HELOCs would come with low interest, which may also be tax-deductible. For clients with little to no home equity, life insurance policy loans are another possible fix.

Those without any assets to borrow against may consider getting an unsecured loan from their bank or credit union. If they have a good credit rating, the institution may agree to offer interest in the single digits. The loan of last resort, McKinley emphasized, should be from credit cards, whether the client decides to charge unplanned expenses to the card or take a cash advance up to their available credit limit.

“But between potential origination fees, higher interest rates and the damage a sudden surge in a balance can do to their credit report, clients should use credit cards only when no other source is available and then attempt to pay the balance down as quickly as possible,” he stressed.

And though it might disappoint some clients, they may also consider selling some investments whose prices have appreciated during the recent run in equity prices. While it may involve taking a slight hit from capital gains taxes, it might turn out less painful than paying interest to borrow money, particularly if the assets were held for more than a year and accrued long-term capital gains over that time.

 

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