Getting commonsense advice on personal finance is everywhere, and yet, paradoxically, hard to find. Notice I said commonsense and that means without the fluff too.
I ran across this article by Kate Ashford on Bundle and thought it a good one to share with you.
Living without a net
You’ve probably heard the advice: If you’re financially healthy, you should have at least three to six months of living expenses squirreled away for an emergency. Given the continued weakness of the current economy, you might want to have more. But you should definitely have something, because you just never know when you might need the extra cash. (And no, I’m not talking about an â€œemergencyâ€ shopping trip to Macyâ€™s.)
How many of us have that emergency money lying around? Not so many. In fact, about a quarter of us have more in credit card debt than we do in emergency savings, according to a recent Bankrate survey. Another 20% has no savings, Bankrate finds.
But it only takes one bit of bad news to upset your financial balance, and if you have no safety net, youâ€™re going to have to scramble to find the money somewhere — or put yourself into crazy debt. Here are a few real-life examples of the kinds of emergencies that can torpedo your finances.
You could have an accident. Susan*, 50, and her husband Tim, 48, were doing just fine financially until Tim crashed his motorcycle three years ago while taking a racetrack class. He broke his collar bone and smashed part of his hand, and a string of surgeries resulted in a lot of missed work as a mechanic. â€œHis boss is a good guy, but he just couldnâ€™t afford to keep him on, so he had to let him go,â€ Susan says. In the confusion of unemployment benefits and medical procedures, Tim waited too long to file some of his health insurance claims and the couple wound up with $18,000 in medical bills.
Tim collected unemployment benefits while he was out of work, but the loss of income took its toll, forcing Susan to crack open her 401(k) and ask her father for financial help. Today Susan and Tim are waiting to hear if theyâ€™ll be approved for home loan refinancing. If theyâ€™re not, theyâ€™ll be declaring bankruptcy. â€œWe really are trying to do the right thing,â€ Susan says. â€œBut we just canâ€™t pull out of it. Weâ€™re stuck with the house at this mortgage rate. We canâ€™t even afford to move. Weâ€™ve gone over this with credit counselors and financial managers, and thereâ€™s really no other move we can make.â€
Your marriage might not work out. When Zoe, 48, and her husband separated two years ago, she was a stay-at-home mom with three children and no income or savings, and her husband quickly made it impossible for her to make ends meet. â€œHe said, â€˜Iâ€™m only going to give you $800 a month,â€™â€ Zoe says. â€œWe have three kids and a house payment. I had to call my parents and borrow money. I was basically living hand to mouth.â€ She was able to find a retail job, but she couldnâ€™t work full-time because she couldnâ€™t afford child care. â€œIt was terrifying,â€ she says. â€œI would wake up in the middle of the night just scared to death about everything because I had no means of supporting myself. If my parents hadnâ€™t been there, I donâ€™t know what we would have done.â€
Zoe and her husband are still in the middle of divorce proceedings, but once they reach a settlement, she plans on using part of the settlement money to fund an emergency fund with six months of living expenses. â€œThis really made me realize that there should have been something there for me in the event that something like that happened,â€ she says. â€œItâ€™s become very clear that I can never be in that position again.â€
You could lose your job. Several years ago, Amy, 36, and her husband lost their jobs within six months of each other. At the time, they had three children and no savings. Friends and neighbors helped them out for a while, but two years later they had to file for bankruptcy because they could no longer manage their day-to-day expenses. â€œWe had a lot of credit card debt by that time,â€ says Amy, whoâ€™s also the author of The Power to Never Give Up. â€œThe bankruptcy took our home.â€
Amy believes that if theyâ€™d had emergency savings, they could have managed for longer â€” or maybe avoided bankruptcy altogether. â€œWe had nothing to fall back on,â€ she says. â€œNeither one of us was taught to have a savings account. We were young, we didnâ€™t think weâ€™d have any kind of health problems and we faced a lot of medical bills and auto repairs. It can happen to anyone.â€
Where to find emergency cash:
Clearly, the best scenario is for you to have extra money on hand for emergencies. But if you donâ€™t â€” and something dire happens â€” thereâ€™s definitely a right and a wrong way to handle it. Ted Toal, a financial planner in Annapolis, has these pointers:
Consider your house. Do you have equity in your home? If youâ€™ve still got a job, you might be able to take out a home equity line of credit (HELOC) that could tide you over in your time of need. Rates are low â€” about 5 percent on a $30,000 HELOC right now â€” so itâ€™s a less expensive way to borrow money. (And it stands to reason that if you already have a HELOC available to you, you should tap that before anything else.) Just make sure your job feels stable before you do this, because if you default on HELOC payments, youâ€™re putting your home at risk.
Use credit cards sparingly. If you have no other options, charging an emergency to a credit card isnâ€™t the worst thing in the world, as long as you commit to diligently paying it off. If youâ€™ve got time, you could also apply for a card offering zero-percent interest for six to 12 months and use that instead. Just make sure you make every effort to pay the balance down before the interest rate spikes.
Borrow from your 401(k). If youâ€™ve been saving for retirement (and you have, right?), you might be tempted to empty that piggy bank. Do it only as a last resort. â€œThatâ€™s the last thing you should do, because then youâ€™ll pay taxes and a 10 percent penalty,â€ Toal says. A better option, if you must: Borrow from your 401(k). Just know that if you lose your job, youâ€™ll owe the money back within 30 to 60 days or itâ€™ll count as a distribution.
And of course, if youâ€™re not in the middle of an emergency, nowâ€™s a great time to start amassing cash in case one hits. Click here for a game plan.
Kate Ashford writes about personal finance and health. Find her at HerTwoCents.com.