Q: Help! I’ve been hit with a financial emergency and I don’t know how to pay for it! What are my options?
A: Ideally, you’ll want to have an emergency fund in place for this very reason. If you don’t, or the money you have set aside isn’t enough, you have several options to consider.
We’ve listed some ideas below. Be sure to review the pros and cons of each before determining which option(s) will work best for you.
1.) Credit cards
For many people, when faced with staggering and unexpected bills, the default option is to pull out their plastic. Unfortunately, following this trend can put you on the fast track toward a lifetime of debt and playing catch-up because of this one-time emergency.
Credit cards offer incredible convenience. With your card in hand, you don’t have to wait for approval, take on another source of debt, or even think about how you’ll pay for it all until later.
When you borrow with a credit card, though, you’ll get more than you bargained for. With interest rates that can soar (in some cases, to an astronomical 30%), you’ll end up paying a lot more money than what you initially borrowed.
To make it worse, credit cards are designed to keep you in debt. They make it easy to push off paying what you owe by only requiring a minimum monthly payment. With accrued interest, paying only the minimum each month means you’ll hardly be making headway on that debt at all and will end up carrying it for a lot longer than planned. (Please note: Destinations Credit Union has a fixed-rate credit card so you will know in advance if rates ever change.)
2.) 401(k) loans
You may not have an adequate emergency fund on hand, but what you may have is funds sitting in your retirement fund. But, should you crack open a 401(k) to pay for a financial emergency?
Borrowing money from a retirement fund should only be used as a last resort. It’s really advisable only for those whose credit has been shot and won’t qualify for another loan. 401(k) loans have a low interest rate, but will affect your future financial stability in ways other loans will not. For this reason, experts only recommend borrowing from a 401(k) if you are completely secure in your job and the money will be used for a sound investment. Using this money to fund a medical emergency or household repair is not such an investment.
Also, payments for the loan will be taken out of your future paychecks, so be sure you can afford less regular income before borrowing from a 401(k).
3.) Friends and family
For many, friends and family are the obvious answer when you need someone to bail you out during a rough time.
But is this solution really so obvious?
For some, it may very well be the case. Borrowing from friends and family means borrowing without interest and being granted generous loan terms. However, it can also get sticky, fast.
Only borrow from people you know and love with these guidelines in place:
- Have a clear repayment plan in place and be sure you can stick to the set timeline. Don’t accept any offers of “pay me back in 10 years,” or that debt will be haunting you for a very long time.
- Write down the loan terms and create a shared contract detailing all of the terms and the repayment plan.
- Consider having a third party witness the loan and sign the contract.
- Keep your financial and personal relationship separate. As long as you’re making your payments on time, there’s no reason to discuss the loan every time you speak.
Borrowing from those you hold most dear means putting a cherished relationship in jeopardy. Do not go this route unless you are confident your relationship can stand up to the test and you are absolutely sure you can repay on time.
4.) Personal loans
Personal loans exist for reasons like these. Since they have no explicit purpose, you won’t need to give any lengthy explanations for why you need the money and you should have the funds in hand rather quickly.
Unfortunately, though, personal loans are unsecured and most of them come with high interest rates and fees. You’ll also need to have decent credit to qualify. As a member of [credit union], though, you have access to personal loans with affordable rates. They may just be your way out of a financial bind!
If you think a personal loan might be right for you, call, click or stop by Destinations Credit Union today to learn all about our rates and payment options. We’re always here to help you out!
Setting up an emergency fund
It might be too late right now, but it’s never too early to start thinking about the future. Start setting up your emergency fund today so you’re never stuck in a tight spot again.
Here’s how to make it happen in five simple steps:
- Create a goal for your fund. Ideally, an emergency fund should have enough cash to cover your living expenses for 3-6 months.
- Review your monthly budget to find places to cut back. Alternately, look for ways to boost your income.
- Determine how long it will take you to reach your goal by allocating the saved or earned money to your emergency fund.
- Open a savings account specifically for this purpose.
- Set up automatic monthly transfers from your checking account to your emergency fund.
Now you can sit back and watch your emergency fund build itself into something substantial that will help you sleep better at night. From here on, unexpected expenses or setbacks won’t throw you for a loop. You’ll be prepared for anything!
Your Turn: Do you have a secure plan in place for emergencies?