Three Ways to Handle Unexpected Expenses

Posted on Saturday, October 17th, 2009 at 9:42 am in Financial Planning

Most of us are fortunate enough to have a few different options for raising a bit of money when we need it. Here are three of the most popular methods of covering a sudden but important expense:

Raid your savings: Finance experts say you should always have an emergency fund stashed away in a savings account for those times when you need to pay for something urgently, or when you lose your job. Having a bit of money put away can save you from having to pay the interest on a loan. Make sure you get a good return on your rainy-day fund by putting it in a high-interest account, but be wary of locking it away in a CD, for instance, to avoid heavy penalties for early withdrawals. Once you’re back on your feet, don’t forget to replace the money you’ve used.

Tap into your home equity: This can be one of the cheapest ways to raise cash. If your house or condo is worth a fair bit more than the balance on your mortgage, you can take out part of the value in cash. You can either get a home equity loan, which is a lump sum, or a home equity line of credit. This is a credit facility that allows you to draw as much as you need at any time, up to your limit, in much the same way as a credit card.

Since they are secured on your home, interest rates on both these home equity options are comparatively low. A home equity line of credit carries an especially low rate, and can be a very attractive way to borrow money since you only pay interest on your current balance. The interest you pay on either product is normally tax-deductible, but you should still consult a professional financial advisor to see if this is really the best option for you. If you miss a repayment or default on your loan, you stand to lose your home. Also, keep in mind that your home equity loan or line of credit increases your mortgage. Therefore, if your emergency drags on for longer than anticipated, or the property market crashes, your home could end up being worth less than you owe on it.

Use your credit cards: Your “flexible friends” can save your bacon when you’re out of cash. If you have a medical bill or auto repair charge to settle, you could put it on your credit card and then pay it off over a few months. Remember that you’ll be charged a fairly high rate of interest, though, so pay as much as you can every month. Cut some other expenditures if necessary, to minimize your overall interest costs. If you’re unemployed, don’t be tempted to use your credit card to pay for your day-to-day expenses. You do have to pay back what you owe, and you’ll probably hit your credit limit quickly.

Related posts:

1. Use Your Home Equity to Lower Your Monthly Debt Payments
2. 3 Ways to Get Out of Debt
3. 4 Ways to Borrow Smart
4. Cutting back on expenses and without the feeling of being deprived
5. Different Ways to Borrow Cash