Facing unexpected expenses? Borrowing may be smarter than liquidating assets
Even individuals with significant wealth can encounter short-term cash flow challenges. When much of your net worth is tied up in illiquid assets like retirement accounts and real estate, accessing funds quickly for unexpected expenses can be difficult. In these situations, a strategic approach to borrowing may offer a smart, tax-efficient way to bridge the gap without derailing your long-term financial goals.
The taxing truth about illiquidity
There are many scenarios that can create a need for more cash than you have readily available – unexpected medical bills, a legal settlement, a tax bill from selling an asset, or even unforeseen dips in income or a time-sensitive investment opportunity.
While liquidating assets is one way to increase available cash, the trade-offs are often significant. Capital gains taxes – especially short-term gains – could bump you into a higher income tax bracket or worse – liquidating high-performing assets could disrupt a well-balanced investment portfolio or your long-term financial plans.
A smarter source of cash
When facing a temporary liquidity shortfall, borrowing may offer several advantages over selling assets. It can provide faster access to funds, minimize tax consequences, and keep your long-term investment strategy intact. While there are various ways to borrow money, two lending solutions are especially well-suited for short-term needs:
- Home equity line of credit (HELOC): A HELOC allows you to borrow against the equity in your home through a revolving line of credit. You can draw funds as needed (up to a certain limit), and you only pay interest on what you use. While rates are typically variable, they are generally lower than those of credit cards.
- Brokerage secured personal line of credit (Brokerage secured PLC) ): This tool is similar to a HELOC but uses a portion of your investment portfolio as collateral instead of your home. This option may be particularly appealing to those with a substantial portfolio and desire to avoid real estate-based lending.
For single major expenses, a longer-term solution like a home equity loan may be preferable for its fixed interest rate and predictable payments.
Consider the full picture
Strategic borrowing isn’t just about solving a short-term problem – it’s about preserving long-term value. Working alongside your CPA, our team of Frost bankers can help you evaluate whether borrowing fits into your broader financial strategy. In the right circumstances, leveraging credit can be a powerful tool to support both your short-term flexibility and your long-term financial health. Contact Brad Clark at 214.515.4870 or Brad.Clark@frostbank.com to learn more.
Deposit and loan products are offered through Frost Bank, Member FDIC. Frost Bank and its affiliates do not provide tax or legal advice. For guidance tailored to your personal circumstances, please consult a qualified, independent tax or legal advisor.