Saving money is always a challenge. As prices rise, personal budgets are squeezed tighter and tighter, making it even more difficult to set money aside for the proverbial “rainy day.” In fact, more than 40% of American households don’t have at least $1,000 set aside to the cover the cost of an emergency.
No matter how well you budget, there are still some expenses you can’t anticipate:
- Household expenses
- Car breakdowns and repairs
- Medical expenses from injury or illness
- Natural disasters
- Job loss or temporary unemployment
Because it can be difficult to build sufficient savings to cover unexpected expenses like these – especially in the current economic climate – it’s good to have a back-up plan if the need arises. Depending on your situation, the amount needed and the timing, it may even be a preferable option to borrow to cover an unexpected expense rather than dipping into savings.
It’s also helpful to remember that you may have other savings you could access beyond your savings account. If you routinely invest in your company’s 401(k) plan – or if you have one you’ve invested in the past – you may be able to use those funds in case of emergency. Depending on how you use the funds, it may be considered either a withdrawal or a loan. You’ll want to talk to your fund manager or your company’s human resources team for details about your specific account.
Borrowing options for unexpected expenses
Everyone’s financial situation is unique, but there are some credit tips that may help you navigate your next steps. Be mindful that interest rate and amount of your loan or line of credit may vary based on your individual credit situation and the product you choose, so be sure to compare options before you make your decision:
- Credit Card: If you have an immediate need – for example, a critical car or small home repair that can’t wait – one option is to pay with a credit card. If you have enough available credit on a card that’s already in your wallet, this is a solution that could help you get those repairs done quickly. It also allows you the option to pay that debt as soon as you have cash available or opt to pay it off over time if you prefer. Keep in mind, you could accrue interest charges if you carry a balance from month to month on your credit card account.
- Credit Limit Increase: If your current credit card(s) don’t have sufficient balance(s) available, consider requesting a credit limit increase on one or more of your current cards.
- Personal Installment Loan: If you need a specific loan amount, consider a personal installment loan. Or if you own a home and have available equity, investigate the possibility of a home equity loan. In either case, the installment loan option typically provides a fixed interest rate and a fixed monthly payment amount. This option lets you borrow what you need in one lump sum and pay it off over a designated time period.
- Line of Credit: If you need the flexibility to continuously access a credit amount, a line of credit may be an option to consider. With either a personal line of credit or home equity line of credit, you can reuse your credit line up to your approved credit limit as you pay it back without the need to reapply or wait for funding. This option may be helpful in managing indetermined expenses over time, such as ongoing medical costs or ongoing home repairs.
Regular Budget Reviews
You may be able to avoid borrowing altogether if you have enough advanced notice to make adjustments. Regularly reviewing your budget is a good idea. This gives you an opportunity to identify possible unnecessary expenses. Cutting out those budget items, even temporarily, may be enough to help cover expenses.
How you can prepare for emergencies, even if you can’t save.
While all these borrowing and earning tips may be useful in weathering an immediate financial need, they might be helpful in preparing for the next emergency as well. By taking one or all of these actions now, you’ll find yourself in a better position:
- Make sure you have available credit on your current credit cards – or apply for a new credit card that you can designate for emergency expenses – if possible.
- Consider establishing a personal installment loan, line of credit or home equity line of credit to cover high-dollar emergencies.
- If you can find ways to streamline your budget, put that extra cash – no matter how little – into an emergency fund.
- Know where you can cut your budget. Even if you choose not to eliminate non-critical spending, it can be helpful to know what items can be easily cut and how much money they might save.