Tips for Managing an Unexpected Expense
From a car breaking down to a sudden health emergency, unexpected expenses can crop up at any time. When it happens, you'll need to know how to handle it without breaking the bank.
Fortunately, there are a few things you can do:
Consider Loans and Credit
If you have a steady enough income, then you should consider the benefits of loans and credit. Using loans with installment payments or credit cards with reasonable interest rates is an effective method of paying for unexpected expenses. These options are a good way to cover these sudden costs as long as you know that you can pay them back in a short amount of time. What’s more, it’s imperative for borrowers to make their payments on time to avoid late fees and other penalties.
Prioritize and Freeze Spending
Make a list of all your normal expenses and list them according to your priorities. Once you have established your high-priority items such as food, utilities or rent, cut back on your non-essential items like media subscriptions, trips to restaurants or unnecessary travel. If necessary, cut back to staple food items for as long as you need to financially recover. Life may be less comfortable for a time, but it'll be more than worth it once your finances have stabilized.
Tap Into Your Savings Funds
If you have a 401(k) and need to borrow some money, you can borrow up to 50% of your plan or $50,000, whichever is lower. Remember, however, that loans from retirement savings have to be paid back within five years, or you'll end up saddled with penalties and fees that can lead to financial ruin. If you have a Roth IRA and have contributed regularly to it for five years, then you can withdraw money from it without incurring any penalties. You can even withdraw money from your 529, but that leads to a 10% penalty for non-educational uses on top of having to pay taxes.
Borrow from Your Life Insurance or Your Home
This is another option if you're confident that you can pay back the resulting loan. If you choose to borrow from your life insurance policy, the insurance company will hold your policy as collateral as they loan you the money. If you don't pay it back in a short time, the interest could lead to your debt being larger than the policy itself, and a major tax bill can ensue if you lose the policy. You can also get a home equity loan if your home is of considerable value.
Ask for Help
This doesn't just mean reaching out to friends and family for small loans even though that is a good idea. It also means letting your creditors know about your current situation and discussing a payment plan. Bankers and other creditors are more likely to accept smaller payments than you might think, though it can lead to higher interest rates over time.