INDONESIAKININEWS.COM - As a general rule of thumb, you should have three to six months of living expenses saved in an emergency fund just ...
But if you’re like many Americans, you might not have this financial cushion available. If that’s the case, what should you do if you face an emergency expense?
You have many options, but not all of them are good ones. Here’s how experts say you should pay for an emergency if you have no emergency fund.
Find an Interest-Free Financing Option
This won’t always be available, but in some cases, you may be able to find a way to pay for an emergency expense in interest-free installments.
“Say your furnace needs to be replaced — oftentimes, there are options to finance the purchase of a new furnace without paying interest as long as you make the minimum payment every month,” said Jennifer Stein, CFP, director of client engagement at Priebe Wealth.
Use a Payment Plan To Pay for Medical Bills
You can often set up a payment plan to pay down large medical bills, so check if this is available.
“Discuss payment options with your hospital’s billing department, and see if a payment plan is an option for paying down the expense,” Stein said.
Take Out a Loan From Your Retirement Plan
Wayne Brown, senior partner at Dugan Brown, a financial planning firm, in Dublin, Ohio, recommends borrowing funds from a 401(k), 403(b), TSP or similar account.
“This is an easy way to access additional funds to cover expenses without it greatly impacting your current lifestyle,” he said.
“For example, one could decrease their current 401(k) contributions while applying for a loan, then focus on paying the loan back with the money that would have been put toward the contributions. This results in access to a lump sum of emergency cash without having to take a lifestyle hit moving forward. If you choose to implement this strategy, you should be careful to look at what kind of match you receive from your employer so that you can still fully capitalize on your contributions.”
Use a Credit Card With a 0% Intro APR
“Credit cards are not something I would generally recommend people start carrying a balance on, but in an emergency, it may be what works best,” Brown said.
This is especially true for cards that offer an introductory 0% APR. However, this will typically only be for a few months, so keep that in mind.
“After using the credit card, do everything you can to pay it off before any interest begins to accrue,” Brown said. “Once interest kicks in, paying down the balance on the card should be a top priority.”
Take Out a Personal Loan
“A personal loan is a great option if you want to budget how much you pay over a period of time,” said Tim Schlueter, VP and head of lending at Avant.
“For example, if you get a three-year personal loan, you will typically have a fixed monthly payment, and at the end of the three years, the loan will be completely paid off. This can be really helpful for customers who need help with budgeting and want to avoid getting stuck with high credit card balances. Personal loans also typically have no prepayment penalties, so if you are able to pay a little more than your monthly payment you can pay off your debt faster.”
However, not everyone will qualify for low rates, so be sure to compare what rates you will pay with a personal loan versus a credit card.
“Personal loans from banks used to be a viable option for people in times of emergency, but since the pandemic, obtaining these loans has become more difficult and costly,” Brown said.
What To Avoid
When facing an emergency, your instinct may be to pay in whatever way you can, but Brown warns against taking out a loan against your home or car.
“Home equity lines of credit or taking a loan against a vehicle may be another option for some, but this is an option I would tend to avoid,” he said.
“While interest rates on a credit card are generally higher than that of a HELOC, failing to make a credit card payment would have much leaner consequences than failing to make a payment on your house.”
Source: gobankingrates
