How Do You Fund That Short-Term Urgent Need For Extra Money ?
How do you tide over that short term requirement with the least disruption to your overall financial plan.
There are several ways in which you can fund the shortfall, let us examine these.
1. Credit cards. You can use your credit card, assuming the amount you need is within your credit limits on the card. If you are unable to pay this off by the next bill payment date, it will be the most expensive way to fund the shortfall. As you are aware credit cards charge you an interest rate anywhere between 25% to 48% per year. That is a crazy amount of interest making this your least preferred method.
2. Sell some equity holdings. This is of course a reasonable option. You have been investing because you want money to be available when you need it. There are things to consider such as capital gains, short-term or long-term. At a minimum you will need to pay 10% of profits as capital gains. Also, it might not be a good time to sell, the market might be in a dip. These reasons make it a less preferred option in my book.
3. Liquidate that FD or sell that debt fund. This is precisely the reason you held money in debt / FD, so you could use it when needed. But, there is a tax to be paid on any accrual here too. Depending on your income tax slab rate this could be up to 33% or maybe even up to 38% for some. FDs have a complication. If you liquidate before maturity of the FD, the interest paid will be lower, defeating the purpose of the FD. Similarly, if your debt fund is from pre-March ’23 then you don’t want to sell that as it has a serious tax advantage.
So, while it is a good option, liquidating your debt holdings is not without attendant costs. A further issue with the FDs is that you cannot liquidate part of it. Say you have an FD for 30 lacs and need only 10 lacs for now, you will need to liquidate the entire FD of 30 lacs.
4. Bank overdrafts. This is an option as well, some of the banks offer you the facility of an overdraft against your FD. They will charge you an interest for this. This offers you the flexibility of retaining your FD. You can only use the amount of money you need and for the period you need it. This is a very good option for whenever you need money for a short duration.
5. Loan against securities. Similar to the overdraft against FD, there is the facility of a loan against securities. You can pledge your debt fund (or equity mutual fund) to the bank and avail of a loan (overdraft) against that. This is structured like a savings / current account. You can withdraw anytime and deposit into it at anytime. The duration for which you have taken money out of the account is the duration for which you pay interest. If the annual interest charged is 12%, and you used an amount for one month, then effectively you are paying 1% interest.
I found this to be the most useful way to get funds for a short duration when you need it. Of course, you need to pledge your securities. But for those who are investing for the long term, this makes a lot of sense.
In summary, for that short term money requirement, use the facilities your banks offer. It will cost you a small sum of interest, but it might be better than paying capital gains or sacrificing returns.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
