Cash Crunch Problem, What Would You Do?

cash-crunch

I’ve detailed in an earlier post how I’m building net worth, but losing cash every month. This is a result of me putting a lot of my savings into my 401k. The problem with it is that 401k’s are illiquid. I don’t even know if I should even factor in 100% value of my 401k into my net worth because of the immediate 10% penalty that comes with it. Maybe I should value it at a 10% discount until I’m 59.5. I don’t know. Anyways, the high amounts I’m putting into my 401k is creating a cash crunch problem. Meaning that unless I can come up with a solution in the next month, I will have to rely on paying credit card interest (gasp!). 

In the post above, I’ve outlined how I had $2,500 in emergency funds saved up. At the aforementioned rate of losing cash, it would take about 41 – 42 months before all the emergency cash is gone. However, the problem is that my cash usage accelerated since then. No I didn’t take on debt to buy a fancy new yacht.

I did, however, make the move to a completely new city for a six week temporary work assignment. During this move, I am paying double rent. There’s rent in Alabama and there’s rent in Texas for my six week temporary job here. It was made clear to me that my living costs wouldn’t be sponsored before taking the rotation and I am completely fine with that.

I see that money as an investment for getting the job I really want. However, it is creating a cash crunch problem.

Double Rent Causes Cash Crunch

I’m paying about $1,300 in rent for the six weeks I am in Texas. $2,500 minus $1300 and I should be left with $1,200 right? It shouldn’t cause a whole lot of concern. The problem is, if I do get placed in Texas in January, my lease agreement in Alabama forces me to pay for rent until it’s completely rented to someone else.

So I will have to pay double rent again, come January. The places in Texas are renting out for close to $900 a month in rent, all in. Add in the $640 a month in rent in Alabama and my entire cash balance will be gone. Not only that, I will need additional cash flow to help pay bills.

My cash will be gone because rent has to be paid in the first week of the month. My company will pay for relocation costs if I am placed in Texas for full-time work. However, it will take some time for me to receive the money and I don’t expect the relocation reimbursement to kick in until later January 2017.  After doing the calculation, I will have 3 days until the disconnect from my cash needs will be fully connected. 

Options to Solve the Problem

I love solving problems. I minored in computer science and it was all about problem solving. This is a problem and I’ve thought of few ways to solve them. However, I don’t know which of these options is the optimal choice.

Option #1: Cut Back on 401k

The first option I have is to cut back on my 401k. My current contribution rate is 50%. If I lower that to 30% for the next 2 paycheck periods, I will have an extra $700 (give or take 50 dollars) in after-tax money to fund my move. Wasn’t that an easy problem! Cut back savings to have more cash, right? It seems simple enough.

The problem with this approach is that 1) it increases my taxable income and 2) Alabama actually has state and local income taxes. Not only will I pay more in federal income taxes but I will pay more in state and local income taxes.  

I generally hate paying taxes. I don’t want to pay the government a penny more than I have to if I can legally find ways around it.  As such, I would prefer to cut back on my contributions in a state that doesn’t suck out income taxes, but this is a viable option I could pursue to solve the cash crunch problem.

Option #2: Transfer My Trading Account Money to Savings

I have about $25,000 in my investment account for my day trading pleasures. I can’t help it. 401k is for my retirement which I will never ever touch and my trading account is to satiate my trading hungers. I could transfer maybe $1,000 or so to my savings account and it wouldn’t really matter because within 10 days of transferring the money, I could transfer the same amount (and then some) right back to my account.

The problem is, I could miss out on important economic events that would prevent me from day trading on. Day trading is prohibited for me because I am flagged as a pattern day trader in my account. I cannot day trade unless I maintain equity of $25,000 or more. 

Option #3. Take on Debt

I’ve gone as far as looking at debt options. I’ve looked at Lending Club and some of those rates are really cheap. The cheapest one I’ve seen was a 5.32% APY, which isn’t a substantial amount because I can pay off my debt within 3 days. I don’t know exactly how much interest I would have to pay but it would be in the 6- 9% APY range if I had to take my best guess. Debt isn’t such a bad option if I can pay it off in a short amount of time, paying almost no interest, and because the value I get is greater than the cost of taking on debt.

The problem is, I don’t know if it’s the cheapest option out of the 3.

Conclusion

My cash crunch is only in effect for 3 days. My bills are due on January 10th, 2017 and I get paid on January 13th, 2017. The money that I will be paid on January 13th is a substantial amount, enough to cover all of my bills and then some. I’m projecting to receive about $2,200 in AFTER-TAX money.

That one paycheck will solve all of these problems if I receive it sooner, but that’s not the case. I need to solve this cash crunch problem that I have in front of me for when the inevitable time comes. I’ve thought through some of the options that I have but I’m not sure which of those options is the best one.

Readers, what do you think of this cash crunch, have you gone through this before? How would you solve it? Let me know in the comments below!

Finance Solver

I grew my net worth to $40,000 as a college student through hard work, discipline, and a little bit of luck. I graduated college in 2016 and will be starting to plan for my retirement once I start working.I am planning on reaching financial independence by my early 30's and I will document my moments of inspiration all the way to desperation here.

My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!

Read more about me here.

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7 thoughts on “Cash Crunch Problem, What Would You Do?

  1. I vote for Option 2. With Option 1 you lose money to federal and state income taxes. With Option 3 you lose money to interest. With Option 2 you lose the option to day trade for a limited window of time.

    Option 2 is the only choice without guaranteed losses. Maybe you miss out on a day trading opportunity, but at the same time day trading can lead to gains or losses. Because the potentials in the day trading option are uncertain and the other two options have certain losses, I would go with Option 2.

    (That said, none of these are bad options for such a short window of time.)

    Thanks for an interesting post!

  2. I agree with Matt, go with Option #2. Plus, you shouldn’t be day trading anyway! 😉

    In my case, I have a HELOC with $100k limit, so if I ever get into a cash crunch, I tap into that and then pay it back when I am able. Since you are renting, you don’t have that flexibility.

    The only other option you may have is to take a loan from your 401k. Many employers allow you to do this up to 50% of the value of your loan balance. You will pay interest, but it will be to yourself, so it is not a bad deal. The only downside is that if you leave the company while your loan is outstanding, you will have to pay it back immediately.

    Good luck!

  3. I would also suggest option #2 for the reason mentioned by Matt. “Save money and invest the rest” they say. You do have money saved up, you should use it before you allocate it to your investments.
    I’ve several of these events in my life and that’s why my emergency fund is several months worth of spend. Whether it’s a transition between apt, a new car, or any other unexpected expense, it’s always better to be safe (have cash) than sorry (sell equities or take on debt).
    Maybe I’m too conservative, but it’s proven to remove a significant amount of stress on financial events.

  4. Only 2 days huh. Not sure if it will work in your case, but one thing that works for me is use a credit card. Depending on the timing of the credit card due date you can defer a payment on anything paid by credit card by up to 60 days with no interest. I wouldn’t play that card often because it can get yourself in trouble, but it might be a cheaper solution if you can pay some of those bills with a card and kick the can a few days. A 0 percent interest card might even kick it further if needed.

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