Cynopsis: Knitting A Safety Net

Article for Cynopsis email newsletter KNITTING A SAFETY NET

By Mark Levine Every personal finance expert out there proclaims that the single most important thing you can do in these turbulent times is set up an emergency fund. And every one of us out in the real world knows that’s far easier said than done. It’s hard enough just trying to make ends meet and keep up with loan payments. If there’s anything left over there’s retirement and the college funds to think about. Knitting a safety net is one of those ideas that sound great in theory but seem impossible in practice. Difficult it may be, but it’s not impossible. And strangely enough, some of the best tactics involve your work life, not your personal life.

First, consider increasing the number of dependents you claim on your W2 form in order to lower the amount withheld from your paycheck for taxes. The number needn’t match the number of dependents you actually claim on your tax return. There’s nothing illegal about a single individual with no children claiming, say, 10 dependents to minimize withholding and maximize the size of a paycheck. As long those make-believe dependents aren’t claimed on a 1040 the government won’t care. What’s essential is you don’t stop there, but go on to set up a direct deposit in the amount of the “found money” to a new bank account. Otherwise that extra money will end up being spent.

Second, gather all the information available from your employer on its rules about withdrawals and loans against 401(k) accounts. Most plans allow you to make hardship withdrawals from your 401(k), and many plans allow you to take out loans from the account. Hardship withdrawals are designed for certain situations. However few employers want to get involved with their employees’ personal lives and so rarely push for proof. The downside is considerable, however, since you’ll owe taxes on the withdrawal as well as a ten percent penalty. Some plans offer loan options, which let you pay back the money over time without penalty or tax consequence. This isn’t something to do lightly, however if there comes a time when you need the money, it can be a real lifesaver. Factor these monies into your safety net calculations.

Finally, if you have equity in your home, investigate a home equity line of credit. The secret is to apply for it while you’re still working and are a desirable customer for the lender, rather than waiting until you lose a job and become a pariah. Tap into the equity line for a small amount every six months or so, and then pay it back, to keep the account active and make the lender happy.

No one wants to employ these maneuvers. But desperate times can call for desperate measures. If you find yourself in real financial trouble, focus on today, and don’t worry about tomorrow.