You've watched your cooing infant grow into a respectful, hard-working young adult who's about to graduate from high school. To celebrate his or her first steps into the big world, you want to give your child something special—a car for the commute, a computer for college or a trip abroad for a horizon-broadening experience. This kind of graduation gift is going to cost you, and if you don't plan ahead, you may be tempted to put the whole thing on a credit card. Don't do that. If you put just $2,000 on a card with an 18 percent APR and make minimum payments of approximately $40, it will take you about 19 years to pay off the balance. That's longer than it took you to raise your child in the first place. Instead of borrowing outright, consider using your investments and assets to your advantage.
Access Your Life Insurance Funds
If you have a whole-life insurance policy (or a variable or indexed universal life policy) and you've built up enough cash value, you can withdraw the amount you've paid in premiums (your "basis") tax-free. You can also borrow against your policy, though this requires you to make interest payments until you repay the loan. Because both methods will reduce the amount your beneficiaries receive at the time of your death, ask your insurance agent to run an in-force illustration, so you understand how the loan will impact your policy and learn about possible tax repercussions. Visit the Journal of Accountancy to learn more about how to read the illustration.
Sell Future Annuity Payments
If you receive regular payments from an annuity or structured settlement, you may be able to sell your future payments for a lump sum of cash now. You also have the option of a partial buyout, so you could continue receiving payments in the future. Visit the J.G. Wentworth page on FaceBook to learn more about selling your future payments.
Borrow Against Your Roth IRA
If you have been contributing to a Roth IRA, you can withdraw funds up to the amount you have contributed without any penalties. That is because Roth IRA contributions have been made with money you have already been taxed on. If you are over 59.5 years old and have had your account for more than five years, you can begin withdrawing contributions and earnings without any taxes or penalties. Check out this Forbes article for more information about borrowing against a Roth IRA.
Some Other Options
If none of these strategies will work for you, find other ways to make money:
- Hold a yard sale
- Sell things like unused exercise equipment and collectibles on eBay or Craigslist
- Go to local consignment stores to sell brand-name clothes
- Take a second job for a few months
- Start a little side business, such as pet walking or house cleaning
All these money-making ideas take work, but it'll be worth it when you see the look on your new grad's face—and you'll be glad you didn't put that special present on your credit card.