A medical emergency, a family crisis, a divorce-these unexpected, challenging events, don’t’ just come with high emotional costs, they are a burden on your finances as well. Many people struggling with high credit card debt ended up with the debt, because they were forced to use their credit cards to cover emergency expenses.
Unfortunately, credit card debt tends to bring with it a whole other set of problems. High interest rates and unpredictable terms make credit cards the least desirable option, when you’re faced with unforeseen expenses. Here are seven tips to avoid tapping your credit cards for emergency cash should disaster strike:
1. Save Now for a Rainy Day Tomorrow. The best way to protect yourself, of course, is to keep an emergency cash fund, ideally enough to cover your expenses for six to eight months. If you don’t have money in a savings account already, begin now to save for a rainy day. Hopefully you’ll never need the money, but should you, you’ll be glad you planned ahead.
If you have credit card debt should you pay that down first? If it’s high interest debt, financial advisors usually recommend getting rid of the debt before putting money in a savings account. However, in the current economic environment, credit card terms are more uncertain than ever, as card issuers have been slashing limits and closing credit cards down left and right.
In other words, if you lose your job, you might find that you no longer have enough credit available on your cards to cover your expenses, or you may find that your credit card interest rate has escalated to a whopping 29.99 percent. For this reason, cash is king; it’s more important than ever to build up a safety cushion. Pay only a little more than the minimum on your credit cards each month, and stash the rest into a savings account. Once you have enough savings to last you for four to eight months, resume your efforts to wipe out that credit card debt as quickly as possible.
2. Reduce your fixed expenses. An often overlooked way to free up extra money is to reduce your fixed expenses on items like debt payments and utilities. In an emergency, many lenders will work with you to reduce your payments temporarily. Utility companies likewise will often be willing to put you on a payment plan. If you struggle with medical expenses, doctors and hospitals will typically allow you to set up a payment plan, so that you can pay back a large debt interest-free over several years. And of course, cut any other fixed expenses you can: cable TV subscriptions, cell phone services, and so on.
3. Get an emergency loan from your bank. If you have equity in your home, tap that with a home equity loan or home equity line of credit. If this is not an option, try to get an unsecured, personal loan from your bank. Small local banks and credit unions with which you have a personal relationship will be more likely to consider you for a personal loan.
4. Dispose of assets. Look through your belongings to see if there is anything you might be able to sell to raise money. Do you have a second car you can do without? A bike, TV, appliance, or a piece of furniture; anything that might bring in a decent sum if you sold it? Online forums like Craiglist.org can be a good resource for selling items that you can do without. Or, consider having a garage or yard sale to sell household items and other items in order to raise cash.
5. Get a little help from your friends. No one likes to ask friends or family for money, however, in cases of emergency, most people are happy to help. Even if your friends and family are unable to lend you money, they might be willing to help you by putting on a fund-raiser, particularly if your financial emergency is due to a medical condition.
6. Look to your life insurance. If you have a whole or universal life insurance plan, you may be able to borrow up to 95 percent against the accumulated cash value (a term life insurance plan does not give you this option). Since you are borrowing against your own money, the loan doesn’t have to get paid back; even the interest on the loan could simply get deducted from the money left in your account. Of course, the more money you borrow against a life insurance policy, the less money will be available to your loved ones when you die.
7. Tap your IRA. In general, it’s not advised to tap your retirement assets unless you have exhausted all other options. However, if you have a Roth IRA, you are allowed to withdraw the contributions you’ve made without having to pay penalties or tax, as long as the account has been open for at least five years. You can withdraw up to your total amount of contributions tax and penalty-free, because you’ve already paid taxes on these. If you have a Roth IRA and have made regular contributions, this can be a nice little chunk of savings.
If you have a 401(k) plan, there is a 10 percent penalty for early withdrawal, but some plans allow you to borrow against the assets in the account. For a traditional IRA, the 10 percent early-withdrawal penalty is waived, if the money is needed because of a hardship. To free up money tied up in investments, cash in CDs first, then sell your bonds, and lastly, if you need to, stocks.
