By Susannah Snider, Oct. 18, 2016, US News & World Report
A financial disaster is hard enough to navigate. But it gets even harsher when you have no emergency fund or backup plan to help you work your way out of it. So, what’s an unlucky person to do after, say, a broken-down car or job loss leaves you short on cash and high on stress?
Fortunately, the financially unfortunate have access to a range of resources for patching up a financial disaster, experts say.
But keep in mind that all of these choices have their downsides. “Ideally you wouldn’t choose any of these options,” says Stephanie C. McElheny, a certified financial planner and assistant director of financial planning at Hefren-Tillotson in Pittsburgh. “None of them are good options – it’s just lesser evils.”
Here’s how to handle a money mishap when you have no backup plan – and no fairy godmother to boot.
Sell your stuff. A quick way to find extra cash without tapping credit is to hawk your belongings. “There are lots of options to get rid of your stuff,” writes Niv Persaud, a certified financial planner and managing director of Transition Planning & Guidance, a boutique financial advising firm in Atlanta, in an email.
Consider peddling your hand-me-downs on eBay, Craigslist and at secondhand stores. Heck, if you can survive without your car – and you’re in dire financial straits – consider letting it go.
Land a part-time job. If you’ve got time to spare, look into applying for a side gig. ”With the holidays around the corner, many retailers are looking for additional help,” Persaud writes. “Another option is [to] use your skills on sites, such as Fiverr, Elance, etc. You can also bite the bullet and babysit for friends [and] family or take care of their pets when they’re out of town.”
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Slash spending. Carve out room in your budget by trimming expenses wherever possible. If housing is a major budget-buster, for example, consider getting a roommate, says Jamie Ebersole, a certified financial planner in Wellesley Hills, Massachusetts.
Do what you can to cut down on eating out and shopping. Re-negotiate or cancel unnecessary monthly bills, like your cable bill, to make your last dollar go further.
After you’re done digging your way out of this financial hole, consider continuing these good behaviors until you’ve built up at least six months of living expenses in an emergency fund.
“It’s best to just be proactive and have that emergency reserve, so this can be avoided, or at least mitigated [in the future],” McElheny says.
Work with your creditors. If your financial disaster revolves around debt, you may be able to negotiate a gentler repayment plan or reduced monthly bill – and carve out some extra room in your budget.
“Actually talk to your creditors,” Ebersole says. “Most creditors are willing to work with you if you’re upfront with them and aren’t trying to hide it.”
Tap your home equity. If you’re house-rich but cash-poor, borrowing against your home’s value can help you fund major, unexpected expenses, like medical bills, with a relatively affordable loan.
Consider a home equity line of credit, a type of revolving credit in which your home serves as collateral. A lender will set your credit amount based on the home’s appraised value, the balance owed on the mortgage and your ability to repay, including your credit history, according to the Consumer Financial Protection Bureau. Or consider a home equity loan, which provides a fixed amount of money, which you repay over a set time period.
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Borrow against your insurance policy. You can access relatively affordable debt by tapping the cash value of your life insurance policy, experts say. In this case, the insurance company will essentially lend you money while holding your policy as collateral.
Keep in mind, however, that if you fail to repay your loan – and it balloons to exceed the policy’s cash value – your policy could lapse and trigger a major tax bill.
Tap your retirement savings. If you have a 401(k) plan, you can borrow up to 50 percent of its vested account balance, or up to $50,000, whichever is less. So, to borrow the full $50,000, you’ll need to have at least $100,000 in your plan. Loans borrowed against your 401(k) must typically be repaid within five years. And failure to repay on time can leave you saddled with penalties and fees.
Savers who have been squirreling away money in a Roth IRA for at least five years can withdraw their contributions penalty-free. “You can always take out the principal without paying any taxes on it,” Ebersole says.
Bottom line: Even if you can repay loans taken from your retirement accounts on time, you’ll miss out on the gains you would have realized had you left those funds to grow on the investment market.
Borrow from your 529. Contributors can withdraw any funds placed in a 529 plan, which is for educational expenses, Ebersole says. But withdrawing money for noneducational expenses isn’t ideal since it can trigger taxes and a 10 percent penalty on the account’s earnings.
As with borrowing from a retirement account, dipping into your college savings account will cost you the returns you would have seen had you let the funds grow on the market.
Ask family and friends. ”Family and friends are always a good place to go if you don’t have any other options,” Ebersole says.
Don’t forget that mixing loved ones and loans can make for a potentially toxic combination. “Borrowing money in any capacity from family has the potential to backfire and can really strain relationships,” McElheny says.
Declare bankruptcy. Another last resort is to declare bankruptcy. But keep in mind that going through bankruptcy will make it hard to access credit for years in the future, including loans for a child’s college education and other useful debt.
To Your Successful Retirement!
Michael Ginsberg, JD, CFP®