How to Survive a Financial Emergency
Life is filled with events, big and small, that can cause you to suffer an economic crisis. You may experience household issues, such as needing to replace a water heater, or sudden medical problems, such as a child breaking a bone. Whatever happens, you will need to react quickly to resolve the issue, but you also don’t want to make an emotional decision that could result in long-term consequences. This means developing an actionable plan that will help you deal with the emergency as efficiently as possible.
Rework Your Budget
The first thing you will need to do is create a new household budget, while determining which expenses you can cut. Whether you figure out a way to cover the added expense of your financial emergency without help, or you decide to borrow the money, you will need the extra money to cover the expense.
This may mean cutting out your morning latte and making coffee at home, or cooking meals at home. You can also eliminate subscriptions to services you don’t really need. For instance, if you use online streaming services, you really don’t need cable or satellite television service any longer. The same goes for subscribing to your newspaper. Any money you free up in your budget should be dedicated to covering your financial emergency.
Pick Up a Side Gig
The next thing to consider is picking up a second job, or finding an additional source of income that will help you cover the added expense. Depending on your career skills, you may be able to offer freelance services online or via the classifieds in your local paper. Alternatively, creative people can sell their crafts, music, writing, or artwork. If these options don’t appeal to you, try asking your employer for a raise, or find out about qualifying for a bonus. The important thing is to find a way to bring more money into the household, so you can pay off your added debts sooner.
Consider Using Your Credit Card
This is a tricky decision to make, because it requires you to anticipate how long it will take to repay your debt. If you believe you can repay the full debt within the same billing cycle, using your credit card may be the way to go. However, if you can’t repay the money that quickly, consider other options. Credit card interest rates are so high that, once they kick in, most of the money you pay will be used to pay off your interest. In that case, it can end up taking you years to repay the money you use to recover from this one financial crisis.
Try a Personal Loan
A personal loan might be a better option, because the terms are usually more lenient. However, before applying, make sure you understand those terms and verify that the interest rate is lower. You will also want to plug the payments into your budget to ensure you can meet that added obligation without difficulty. If you won’t be able to repay the loan on time, you’ll only be making matters worse for yourself. Often, this is the best way to get the money you need to cover a sudden or unexpected debt.
Use Your Home’s Equity
If you are a homeowner, you might be better off using your home’s equity by taking out a homeowner’s equity line of credit (HELOC). This option offers the most favorable terms, because the interest is much lower and the repayment terms are structured a little differently. With a HELOC, there are two phases: the draw period and the repayment period. During the draw period, you can take out as much as you need up to the predetermined limit. You can take the money as you need it until you reach your limit, or until the draw phase ends. At this time, you’ll only be required to make small interest-only payments.
Once the repayment phase begins, you can no longer withdraw money from the account. Moving forward from this point, you will begin making principle and interest payments until the debt is repaid. This phase can last anywhere from five years to 20 years, depending on the terms laid out by your lender. Again, it will be up to you to read those terms and determine if you can meet the demands of that repayment schedule.
Some People Turn to Crowdfunding
In recent years, crowdfunding opportunities have exploded with everyone from investors to college students using this resource. It involves telling your story and sharing why you’re trying to raise money. This can be a great way to raise money to fund a business venture, a hobby, or a financial emergency. The terms of each site vary, so be sure to read the fine print. Essentially, the site takes a small percentage of the money you raise, while allowing you to withdraw your funds and transfer them into your checking account. Just remember that you will be expected to pay taxes on the money you raise.
Ask Family and Friends
Sometimes we overlook our greatest resources. Borrowing from family and friends can help you raise the money you need without having to adhere to strict repayment terms. However, be sure that you do repay the money. Failing to repay your loved ones can leave you in a worse pinch the next time you need money. On the other hand, repaying the money in a timely manner will earn you a good reputation and that’s almost as precious as good credit in terms of borrowing in the future.
Even if you haven’t saved anything to use for your financial emergency, you can use these resources to help you recover. Once you get past this crisis, it’s important to plan ahead for the next one, because there will be more. By saving just 5% of your income from each pay period and depositing it into a high-interest savings account, you can be better prepared for the next economic pinch. Saving ahead can help you avoid experiencing this same situation the next time something unexpected happens.