A help sign for an emergency

Can You Handle An Unexpected Expense?

Emergencies happen all of the time and when they do, they all have one thing in common, they require money. If you experience an emergency expense, how do you plan on dealing with it? Here are some of the best and worst ways that people deal with money problems.

Good Ways To Handle A Financial Emergency

There are good ways and bad ways to deal with an unexpected expense. Everyone wants to handle things in the right way but doing so requires some planning. Let’s take a look at some of the best ways that you can deal with an emergency expense.

Emergency Savings Accounts

Everyone should have an emergency savings but very few do, at least one that is stocked sufficiently. You need a minimum of 3 months worth of expenses in an emergency savings account. 6 months is an even better idea.

The money should be readily available in an emergency which means that it should not be invested. A high yield savings account is the best solution because it will give you quick and easy access to your money while still earning some return.

If you currently have no savings at the moment or an insufficient one, it is time to get it built. Any money can be handy in an emergency so something is better than nothing. Set a monthly savings goal and then find a way to get there. If there is not enough money to save, then you are spending too much and you need to cut your expenses. Saving should be a regular part of your budget. If it is not, your budget is not balanced.

A great way to start that emergency savings is with a windfall. This most commonly will take the form of a large tax return or perhaps a bonus from work. If you do not have a well stocked savings, make it a point to save all or at least the majority of your next windfall.

Lines Of Credit

If you have a good score, a line of credit can be an asset in a financial emergency. Lines of credit are great because they are funds that are available to you that you do not have to pay interest on until you use them.You might have a credit line of 20,000 dollars but if you only use 5000 dollars, that is all you would pay interest on.

Once you apply for a line of credit, you have a set amount of years to draw from the account. An unsecured line of credit is very much like a credit card only with much better interest rates.

You may also choose to open a secured line of credit. While these can be secured by investments or savings, they are most commonly secured by your home equity. A home equity line of credit has the advantage of lower interest rates than an unsecured line. Since the lender has property that they can seize, the risk is lower.

In an emergency, you might choose to use a line of credit instead of your savings. This could keep you from depleting your emergency funds. If you have a line of credit, you could also choose to invest your savings and you could use the returns to offset the cost of credit it you use your line.

Bad Ways To Handle A Financial Emergency

On the flip side, there are a lot of very bad ways that people handle a financial situation. Most of these are a direct consequence of not having an emergency savings. Take a look at some of the bad ways that people handle a financial problem. Maybe it will inspire you to start a savings account.

Payday Loans

Payday loans have been around for centuries in one way or another. Whenever there is someone who needs money now, there will be a lender to give it at a high cost.

In their present form, they have been thriving for decades. Why? Because people fail to save and handle their credit poorly. If you have no money saved for a crisis and you have no access to reasonable financing, a payday loan is where you may have to turn.

There are several problems with payday loans which make them less than ideal to deal with an emergency.

For starters, they are very short loans. You will be paying them back the very next time that you get paid. This might be in as little as 10 days. If you are having a financial emergency, it can be very difficult to deal with it in just 10 days. This means that most people will be unable to comfortably pay the loan back when it is due. The result is that the borrower rolls the loan over or simply takes out another loan immediately. It is a dangerous cycle.

Another problem is the high fees. On the surface, a $15 to $20 fee to borrow 100 dollars does not sound bad but it is another matter when you do the math. That translates to a 400 plus percent interest rate in many cases.

Title Loan

An even worse option than a payday loan is an installment loan.

Take the high interest and fees of a payday loan and then give the lender rights to your vehicle title. It can not get much worse than this.

Title loans are bad credit collateral loans. This means that if you default on the loan and miss a payment, the lender can and will take your vehicle. Just ask one of the thousands of people who have lost their car or trucks to one of these loans if they are a good idea.

They are not.

Wrapping Up

In an emergency, it is perfectly understandable to do what you have to do. If you have no emergency savings or lack the credit score to get a line of credit, you may have to look at some bad choices.

Use the experience as a lesson to get that emergency savings going and to rebuild your credit. Your financial security depends on it.

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James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.