What to Do in Case of Financial Emergency
If you have yet to build up an emergency fund, consider these options to help cover any big, unexpected costs.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter
Sooner or later, you're bound to get hit with an unexpected and eye-popping cost. Maybe a hospital stay will slam you with thousands of dollars in out-of-pocket charges, expensive car repairs will take you for a ride or Uncle Sam will send you a hefty tax bill. Ideally, you've stashed at least six months' worth of living expenses in a savings account to help in situations like these (or in case a job loss stunts your income for a while). But especially for young people who haven't had much time to save, sometimes the cash isn't there.
You may be tempted by easy sources of money that will actually bury you deeper in debt. For instance, a payday loan requires you to pay back the full loan amount from your next paycheck. Sounds simple, but it could come at an annual interest rate of about 400%, according to The Pew Charitable Trusts, and borrowers often struggle for months to pay back the loans. Another costly option is a cash advance through your credit card. You'll usually pay a fee of 3% to 5% of the amount you withdraw or $10 — whichever is higher — and the interest charge is often 20% or more. On top of that, interest accrues immediately, rather than after a grace period has passed as with a standard credit card purchase.
Instead, consider four smarter ways to pay for emergencies when you don't have an emergency fund.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
(Once your current crisis has passed, take some time to evaluate how to prepare for the next big expense, says certified financial planner Brenda Knox, president of Financial Elements. Even on a tight budget, you can find ways to save money, such as cutting out small, discretionary expenses. For more tips, see 7 Strategies to Build an Emergency Fund.)
1. Sign up for a payment plan.
See whether you can set up a plan that would allow you to spread payments for the bill over a few months or more. "Most industries that commonly create large and unexpected expenses have payment-plan options. You just have to ask about them," says Alan Moore, a certified financial planner in Bozeman, Mont.
Some hospitals, doctor's offices and dentist offices set up payment plans with patients. The IRS allows those who can't pay a tax bill in full to make monthly payments through an installment agreement. Before you seal the deal, consider the interest rate and other fees you may be charged. With the IRS installment agreement, for example, you will pay a setup fee, which varies depending on your income and how you pay, as well as interest (the federal short-term rate plus 3%, adjusted quarterly) and a monthly 0.25% late-payment penalty.
You could also try to negotiate for a lower bill. A hospital, for example, may accept less than you owe if you hand over a lump sum rather than make monthly payments. Don't be afraid to explain that you're just getting on your feet financially. Small businesses may be especially flexible and sympathetic to a young person starting out, says Knox.
2. Ask Mom and Dad for a loan — the right way.
Going to your parents for money isn't an earth-shattering idea. The trick is to put some thought into it. First, consider whether they are in a position to assist you. Your parents shouldn't have to go broke financing your bailout, after all.
If you decide to ask them for help, figure out how much you would like to borrow, the term over which you would repay a loan and the interest rate you would pay, says certified financial planner Cheryl A. Costa, a principal at Forteris Wealth Management. "Parents usually have cash sitting in checking or savings accounts earning next to nothing," she says. "If a child pays an interest rate of 2% to 3%, it's a win-win."
Once you come to an agreement, put it in writing. Both you and your parents should sign it — and it's not a bad idea to have a third-party witness present in case there's any dispute in the future, says Megan Rindskopf, a certified financial planner with Clearview Wealth Management. Or you could use a site such as LendingKarma.com (opens in new tab) or LoanBack.com (opens in new tab) (each charges $30 for a basic package) to set up a loan, including a payment schedule and e-mail reminders. (Bonus: Even if your parents are willing to be less formal with a loan, you'll probably get brownie points for coming to them in such a mature, responsible manner.)
3. Tap your Roth IRA.
Pulling money from retirement savings isn't optimal. But the good news about tapping a Roth IRA is that you can withdraw contributions that you've made to the account without incurring taxes or penalties. (If you withdraw earnings on your investments in the account, however, you could be hit with taxes and penalties. For more on IRA withdrawal rules, see 8 Reasons You Need a Roth IRA Now.)
4. Use credit cards wisely.
Some advisers recommend that young people steer clear of credit cards in a pinch. For one, the interest charges can get ugly. If you put $3,000 on a card with a 22% interest rate, for example, and made a $90 payment each month, it would take more than four years to cover the bill—and you'd pay $1,679 in interest along the way. (Use Bankrate's Credit Card calculator (opens in new tab) to test other scenarios.) Plus, falling behind on payments or creating a high level of debt as a proportion of your credit limits could cause your credit score to suffer.
If you have good credit, a reliable stream of income and the ability to pay off your debt within a year or so, opening a credit card with a 0% introductory annual percentage rate might work for you. But at the end of the introductory period (often up to 18 months), the rate will jump—sometimes to as high as 22%, depending on your creditworthiness. Think carefully about whether you can pay off the balance on time before you go this route. And be aware that if you apply for a few credit cards in a short period, your credit score could take a hit.
Lisa has spent more than15 years with Kiplinger’s Personal Finance and heads up the magazine’s annual rankings of the best banks, best rewards credit cards, and financial-services firms with the best customer service. She reports on a variety of other topics, too, from retirement to health care to money concerns for millennials. She has shared her expertise as a guest on the Today Show, CNN, Fox, NPR, Cheddar and many other media outlets around the nation. Lisa graduated from Ball State University and received the school’s “Graduate of the Last Decade” award in 2014. A military spouse, she has moved around the U.S. and currently lives in the Philadelphia area with her husband and two sons.
ETF Funds for Anti-ESG Investors
A new crop of anti-ESG ETF funds offers an alternative to investments that focus on environmental, social and corporate governance issues.
By Kim Clark • Published
Stock Market Today: Stocks Finish Mostly Higher After First Citizens Buys SVB Assets
The Nasdaq closed lower, though, as mega-cap tech stocks declined.
By Karee Venema • Published
The 50-30-20 Budget Rule is a Simple Way to Save Money
Saving Using the 50 30 20 budget rule is an easy way to save as it keeps budgeting simple while helping you prioritize saving and pay off debt.
By Erin Bendig • Published
The 25 Cheapest Places to Live: U.S. Cities Edition
places to live Take a look at our list of the cheapest places to live in America for city dwellers. Is one of the cheapest places to live in the U.S. right for you?
By Dan Burrows • Last updated
Sharing His Path to Success
Starting Out: New Grads and Young Professionals This Native American studied tech in the Air Force and landed his dream job. Now he’s giving back.
By Emma Patch • Published
PODCAST: How to Find a Job After Graduation, with Beth Hendler-Grunt
Starting Out: New Grads and Young Professionals Today’s successful job applicants need to know how to ace the virtual interview and be prepared to do good old-fashioned research and networking. Also, gas prices are high, but try a little global perspective.
By David Muhlbaum • Published
How Our Family Fights Inflation
Budgeting Millennials typically spend more than other generations on certain expenses that have been increasing most rapidly. Here are some tips to cut your losses.
By Lisa Gerstner • Published
Estimated Payments or Withholding in Retirement? Here's Some Guidance
Budgeting You generally must pay taxes throughout the year on your retirement income. But it isn't always clear whether withholding or estimated tax payments is the best way to pay.
By Rocky Mengle • Published
Gas Prices Around the World
Budgeting Many world gas prices can make what Americans pay at the pump seem like a bargain. But not all.
By David Muhlbaum • Last updated
What You Can Do About Medical Debt
Budgeting Millions of Americans are awash in debt from medical care. If you’re one of them, we have your options, whether the bills are new or a collector is calling.
By Elaine Silvestrini • Published