At some point or another, everyone faces a financial emergency. There are job losses, medical bills, lay offs and car accidents, all of which can put a strain on your finances. Here are ways to deal with unexpected expenses.
Many financial advisors recommend establishing a savings account for emergency situations. This money can help you cover expenses when you are facing financial troubles. Using your savings while you are unemployed or dealing with an expensive medical issue can keep you from paying the interest that would be required if you borrowed money. Talk to a representative from your bank about how far your savings can get you while you are not receiving an income or facing considerable expenses. Then, once your financial situation is resolved, be sure to replenish the funds that you depleted so that you are covered if lightening strikes twice.
Using your home equity
Using your home equity can be one of the most economical ways to borrow money. A home equity loan is a loan that is secured by the equity in your home. This is sometimes referred to as a second mortgage or borrowing against your home. The loan allows you to tap into your home’s built-up equity, which is the difference between the amount your home could be sold for and any claims held against it. A home equity line of credit is a revolving line of credit that is secured against the equity in your home. It enables you to withdraw money, as you need it. Because it is secured against your home, it allows you to get a lower interest rate than you would normally get on an unsecured credit line.
The interest you pay on a home equity loans and lines of credit is usually tax-deductible, but that doesn’t always mean that this is the best choice while you are facing a financial emergency. If you fail to make your payments, you are putting your home at risk. Similarly, if your emergency lasts for a longer time than you expected, you could risk owing more on your home than it is worth. Your mortgage lender or financial advisor should be able to field any questions you have about tapping into your home equity when you are facing a financial emergency.
Credit cards are a convenience when you need to cover some expenses but don’t have enough cash. If you have a hefty one-time fee you might consider using your credit card to cover it and then adjusting your monthly budget so you can repay the debt. Keep in mind that you will be charged interest - usually at high rates. If you have lost your job, it can be risky to use your credit card to cover all of your living expenses. You will be expected to repay what you owe and if your financial emergency lasts longer than you expect, you might reach your credit limit or not be able to cover your monthly payments.