Unexpected expenses are a common aspect of life. Ideally, you’ll have an emergency fund in place to pay for unexpected expenses. However, if you don’t then you’re not alone. It’s true that the Federal Reserve reports that just 39 percent of Americans could manage to cover an unexpected cost that was $400 or more.
If you’re experiencing an economic crisis and require cash immediately, there are choices. Let’s examine various options you can take today to pay for the cost of an unexpected expense, and also prepare yourself for unexpected financial crises in the near future.
1. Use a Credit Card
Utilizing the credit card to cover unexpected expenses generally isn’t a good option. The average credit interest rate on credit cards being 16.4 percent at the time of November 20, 2021 in accordance with the Federal Reserve, a sizable unexpected expense could result in an interest-rate debt that will increase over time. If your emergency funds aren’t what you’d like it be, making smart usage of the credit card can help get through the storm.
If you have good credit, you may be eligible for an credit card that has a zero APR initial period of between six and 21 months. This could suffice to cover your expenses and avoid the interest charge altogether. Keep in mind that you will see the rate rise to the card’s regular interest rate after the promotional period ends and will be applied to any balance that remains.
2. Get a Personal Loan
If the sum you’ll need to cover the unexpected cost is more than what you’re able to pay back within the period of interest-free repayment the personal loan might make more sense. When you take out the help of a personal loan, you’ll typically get a lump sum payment which you pay back in monthly installments for a particular duration of time.
It is possible to secure the personal loan with a lower interest rate than what you get when you use credit cards. The average interest rate for a 24 month personal loan is 9.38% according to the most recent figures provided by the Federal Reserve. In general, personal loan rates can vary from 6% or 36% contingent on the lender as well as your creditworthiness.
Personal loans can assist you in getting through an arduous time by giving you quick access to the funds you require. The length of time for funding varies from lender to the lender, and can range from one day up to several days before you can get your money.
3. Request a Salary Advance
A cash advances from the employer can aid you if you’re struggling financially. A salary advance occurs the time you get an increase from the employer, which you pay back through deductions from your payroll from your next pay checks. You are required to repay the advance within a specific time frame, as per the policy of your company’s salary advances.
In general, the policy determines interest rates and loan conditions that are identical for every employee regardless of credit score. The payday advances offer a more beneficial alternative to payday loans, which come with high fees and stipulations conditions.
Payday apps for early paydays are a great method of earning money from your job prior to your regular payday. In addition, they’re more secure as compared to payday loans.
4. Borrow From Life Insurance
If you have a long-term life insurance policy like universal life, whole life, or variable universal life it is possible access the cash value of your policy.
The good thing is that you could be able to cash out the funds from your policy and not pay tax on it, so in the case that you don’t take out more than what of premiums you’ve paid. In the event that you withdraw more than your cash value of your account could reduce the death benefit, and that amount will be tax deductible.
Although there is no obligation to repay the life insurance loan however, the loan comes with interest rates, typically between 5% and 8 percent–that will increase till the amount is fully paid. If you die prior to the loan being paid off, any remaining amount owed on the loan is subtracted from your death benefits.
5. Borrow From a Friend or Family Member
Although this option isn’t accessible to everyone, asking your friends and family members for assistance in times of need could be a viable alternative. If you have a friend with money, they might be willing to loan the money you need to get through the financial turbulence.
If you’re uninformed however, taking money from someone you trust could damage your relationship. Avoid this option unless you’re certain you’ll be able to or repay them completely or come up with a different type of agreement (maybe you’ll agree to mow their lawns or even babysit for a couple of months, for example.).
Making a formal loan agreement, also known as promissory note — could help you become a more attractive to a potential borrower, and also assure you “lender” that you’re serious in repaying them. This can also provide them with legal recourse in the event that you don’t pay.
6. Borrow From Your Retirement Account
The borrowing option out of an account like your 401(k) or Roth IRA may help you pay for unexpected expenses however, you should only be thinking about it as an option last resort. If you take money out of your retirement account you’re denying yourself the opportunity to earn interest from that cash and could make retirement goals harder to attain.
You are able to withdraw funds without paying penalties or tax if the money has been contributed to an Roth IRA for at least five years, since the contributions are made using tax-free dollars. You must however pay a penalty of 10% and income tax on amount you take out of an conventional IRA (or 401(k) when you’re younger than the age of 59 1/2 .
Preparing for Unexpected Expenses in the Future
Unexpected expenses can be a nightmare on your financial situation if you’re not cautious. The best approach to manage such events is to plan for them prior to them. Here are some effective strategies to prepare for unexpected costs:
- Make your emergency savings. Fund an emergency savings account with enough funds to cover up to three months of living expenses. This can assist you through any financial crisis. If you think that saving for six months of expenses seems like a lot begin with a lower amount, like $1,000 to ensure you have an adequate cushion against difficult times.Remember that you only access your emergency savings account when essential. For instance, you may look into dipping into your savings in the event that an unexpected emergency requires immediate attention, and you don’t have enough time to accumulate the funds you require. In addition, you can draw emergency funds suitable if taking advantage of your savings will significantly perturb your daily routine.
- Make an budget. When a financial emergency occurs, you may not think clearly. The existence of a budget plan place can ease stress by providing clear guidance that you can trust during an emergency. The budget should contain an inventory of the expenses that you can cut or eliminate without a problem. There are a variety of methods to budget. Finding the one that is most effective for you will make it easier to stay on track with one.
- Cut costs. Your budget can aid you in understanding the direction of your money. Examine your budget and identify expenses you could cut in order to save more money into your emergency savings instead.
- Make more money. Demand your employer to grant you an increase or think about doing a second job in order to earn an extra income. A variety of side hustles are accessible, from rideshare driver to online tutoring. It’s possible you won’t receive the money as quickly as you’ll need it however it’s a great method to earn cash without having to pay for it.
The Bottom Line
In the event of an unexpected expense, it can be anxious and stressful. It’s comforting knowing that you have options to find the cash you require. Think about obtaining cash advances or an intro-APR of 0% credit card. Also, consider possibilities to take out an insurance policy, such as a life or personal loan. Whichever option you take, make sure you have an emergency fund, and take other steps to ensure you deal with financial emergencies in the near future.