Learn to prepare for those cash emergencies before and during railroad retirement. Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors and what I want to talk about today is emergency cash, things like that. Things go on in life that might require, "Hey, I need some money because I don't have any money coming in." Things like maybe transitioning in between jobs, maybe getting laid off, maybe you have a healthcare emergency, those type of things that require cash that can't be met from your daily or your monthly income.
When we think about emergency cash, I guess is the term, we usually think about, "Hey, I need three to six months and I'll just have a pile of cash and sit it in the bank, but there's a problem with that strategy. I shouldn't say a problem, you can always do that strategy so let's not call it a problem, but let's just look at an alternative. The issue with it is you have low interest rates so you're not getting any money on that. You have inflation so actually you're really losing money on it, especially now inflation's well over 3% and you're getting not even 1% in the bank so you're already down. Then obviously the opportunity cost. You have a pile of money sitting in the bank, well, you can't do anything else with it. Those are the kinds of the problems that exist in the emergency cash theory on how to do it.
Let me present five different ways that you can start thinking about it. The first thing to do is, as you prepare for the emergency cash, is to do that budget. Understand your discretionary expenses versus your essential. Your essential is food, water, shelter, that type of stuff. Discretionary is a guys night out, golfing, all those things, those are discretionary, travel. Understand that so that way, hey, if something happens I know what I got to do on my essential spending so that's what I kind need.
As we get further, another thing you could do, let's say, if you have that sum of money is, "Hey, why don't I re-cast my mortgage." What does that do? Let's say, instead of putting the money in the bank, you just give it to the bank. Let's say you have a mortgage. You say, "Oh, here's $30,000." They'll re-cast your mortgage. Not all banks will do this but some will, and then they'll lower your monthly payment, so there's a good way to lower our nut right there on top of that. Like I said, not every bank does that.
Also, in this low interest rate environment, another good way, just pay down your mortgage is a great investment as opposed to just investing in bonds which don't pay much anyway, but that's neither here nor there. The other one is, hey, set up that a home equity line of credit. Don't only use it in emergencies, but while you're working, set that up, it gives you great access to cash if you need it. Now, if you're retired, you really can't do that because you're not employed but you can set up a possible reverse mortgage. It's a little tricky, there's some expensive fees, but something to look at, especially emergency situations is a reverse mortgage. As I said, emergency only.
Another strategy is, hey, fund a Roth IRA. Why you say that? "Hey John, this isn't retirement, it's emergency cash." Well, obviously in the Roth IRA the money grows tax free but your principal, which is nice, can be withdrawn without any penalty. If you need that money ... Let's say if you, for five years, you've put $6,000 in, that's $30,000. If something happens, you can take out $30,000 without any penalty. Now, if you took out the other then there's going to be penalties applied to that, so that's a great way to do it.
Then, a final way is funding an HSA. Well, you say, "Well, I don't have a health emergency." Well, you don't need to have it, you're always going to have some sort of health expenses so you just pay the health expenses with your regular checking account or whatever. You save those receipts and then if you do have an emergency you can take the money out of your HSA for a reimbursement. I have a great video on that called A Good Prescription That's In Railroad Retirement. There will be a link to that. Take a look at that, that's a really good strategy because I love HSA's triple tax-free growth, very, very good.
I hope you found this video helpful. It's another way to look at the emergency cash situation, a chance maybe to grow even a little bit of wealth. Reach out to me if you have any questions, more than willing to help you out, talk to this. Also, check out my boarding for railroad retirement assessment, it's really great for those nearing retirement, kind of understand where you are. Subscribe to my YouTube channel, I'd really appreciate it. It's growing, getting very close to 2,000 subscribers so that's great. Keep sharing those videos because a lot of railroaders do appreciate this stuff. Until next time, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
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