Have you ever found yourself in a situation where something broke and you couldn’t afford to fix it?
Sound familiar?
You’re not alone… I’ve been there too.
In fact, most people are in the same boat as you.
According to the latest survey results, 59% of Americans would be unable to pay for an unexpected $1,000 emergency.
That’s what we are talking about today.
Here’s what you need to know:
- The real cost of financial emergencies
- Quick fixes when you run out of cash
- Building your emergency fund
- Borrowing smarter so you can pay later
Personal Financial Crisis: the Reality
Emergency financial situations show up, despite your best-laid budgeting plans. And they have a nasty habit of arriving with little to no warning.
Statistics don’t paint a pretty picture, either. For example, 43% of Americans state that they would need to borrow money in order to pay for a $1,000 emergency expense.
And here is the punch line:
The majority of people that are unprepared for financial emergencies believe that they can handle a break or two. The problem is, you never know when Murphy’s Law comes to haunt you, and you run short on money.
The Quick Fixes When You Run Out of Cash
The only thing you need when an emergency situation hits you is money.
The more cash you have on hand, the easier your life will be when your laptop stops working or your washing machine decides to bid farewell.
If you don’t have a penny in savings and an emergency strikes you like a bolt of lightning, it is essential to explore all of your borrowing options, rather than going with the first one you see. For example, smaller emergencies can often be easily and quickly fixed with a 500 dollar loan approval, without the need for amassing huge amounts of debt. But a small loan is a loan, nevertheless.
Borrowing money should not become your normal course of action. It is a tool for emergencies, which should be used with utmost care and precaution.
Consider all of your short-term options
When life kicks you in the teeth with a financial emergency, take a deep breath and consider all of the options that are at your disposal before you lose your mind and start borrowing at the first place:
- Do you have an emergency savings account? (double-check it first!)
- Credit line? (use it wisely)
- Negotiate a payment plan with the supplier/manufacturer/reparatory service
- Contact your family/friends and ask them for a loan
The fastest solution is not always the best one.
Make sure that you consider the long-term consequences of your actions when borrowing money to cope with your financial crisis. After all, you wouldn’t want to create even bigger problems for yourself down the road, would you?
Building Your Emergency Financial Cushion
Here is the number one tip for dealing with financial emergencies.
DON’T LET THEM HAPPEN.
Only 27% of Americans say that they have enough emergency savings to cover all their expenses. Which means a whopping 73% of people can’t even dream of having their financial situations in order.
It is sad, but it is reality.
Saving is the only solution to this problem
Saving starts small and then builds up. It doesn’t need to be $10,000 by tomorrow. (Believe me, you can’t even find that amount of cash lying around the house.)
Focus on reaching $500 first. Then, build it up to $1,000. Keep going until you have 3-6 months of expenses saved up.
Even having $500 is a lot better than having $0.
How? Because it is the difference between covering a small break or watch your crisis grow into a monster and start devouring your bank account balance.
Here is the trick:
Set up an automatic savings plan. Direct transfers from your checking account to your savings account. Even $25 a week is $1,300 a year.
Cut unnecessary expenses
Look at your monthly expenses and ask yourself these questions:
How many subscriptions are you paying for that you rarely use?
How much money do you spend on restaurants and takeaways?
You might feel uncomfortable or even judged by asking yourself these questions. You shouldn’t.
It is necessary, though. As you never know until you ask, where you can save money. And what’s more important, every penny that you can cut from your spending and use for a rainy day, brings you one step closer to building your emergency fund.
After all, it is that simple.
Borrowing Smart to Pay Later
There are moments when you do need to borrow money.
There is no shame in that. It happens to all of us from time to time.
What is important is that you borrow smart and not by desperation.
Understand the various borrowing options
Personal loans from your bank or credit union are the way to go, as they have significantly lower interest rates than credit cards. They also offer you fixed payments, which are easier to budget for.
Credit cards are an option, if your emergency is a small one that you can quickly fix. But if you carry a balance, the rates of 24% will quickly start biting into your pocket.
Home equity lines of credit also offer you better rates, but you have to put your home at stake.
What should you ask?
Ask yourself the following questions, before signing on the dotted line:
Can you afford the payments?
What is the total cost, including interest?
Are there any fees or penalties?
The best option is, of course, the one, that doesn’t require you to borrow money at all.
But since we are discussing the options for borrowing money in this article, let me tell you what matters the most:
The cheapest borrowing option isn’t always the fastest, while the fastest one will cost you the most in the long run. So, you have to find the perfect balance, tailored to your specific situation.
Emergency Financial Situations – when They Stack Up
What should you do, when financial emergencies start stacking on top of one another?
Truth to be told, it is one of the most difficult situations that you can end up in, when it comes to money.
The trick is, to prioritize. Housing and transportation always come first, as they are essential to maintaining your job. Medical emergencies are a close second.
Action plan for your financial crisis
When a financial emergency happens, you don’t have time to think and decide what to do. This is why it is essential to have a solid action plan in place before something goes wrong.
- Know what your monthly expenses are, from the most important to the least important ones
- Recognize the areas of your spending that you can cut, should the need arise
- Save the contact information for all your lenders and set up automatic savings transfers
Planning in advance means that when the inevitable hits, you will already have a plan that will save you from loosing precious time and effort.
Wrapping Up
The key to coping with personal financial emergencies is two-fold:
Preparation
Smart decision making
Save that emergency fund, even if you can only afford to put a small amount into it at the moment. It doesn’t matter where you begin, as long as you start today. Because 73% of Americans are saving less than they used to, which only means that the race for financial resources gets more competitive with every passing day.
Know all of your borrowing options before you actually need to borrow money. Learn their terms and interest rates, and have a backup plan in place.
And most importantly… Don’t be stressed when you run into financial problems.
After all, we are not striving to live our lives without financial crises. (That is simply unrealistic.) We are simply trying to survive them, without losing everything that we worked so hard for.
What should you do right now?
- Open a new savings account for your emergency fund only
- Set up automatic savings transfers
- Research your borrowing options and know them like the back of your hand
- Cut one spending habit that you can do without and redirect that cash into your emergency fund
Saving money is not about being rich. It is about being prepared. Start building that preparation today, as your future self will surely thank you for it.
