You're sticking to your budget, paying bills on time, and even putting money away for retirement. Then out of the blue, your furnace needs to be replaced or that knocking in your car engine turns out to be a major problem. When a large, unexpected expense arrives, it can send your careful money management practices into a free fall. What are your options?
That depends on how financially prepared you are, says Miranda Marquit, whose blog, Planting Money Seeds, aims to help people get a handle on their finances and grow their wealth.
Tapping Into Emergency Savings
Ideally, you should have enough cash in an easily accessible account to cover three to six months of expenses as a safety net. But that goal may not always be easy to achieve, especially for young professionals still paying off student loans. Even so, Marquit says, every little bit helps.
"One of the best things you can do is set money aside for emergencies," she says. "Set up an account and have money transferred there automatically. It can be difficult, but developing the habit — even $50 or $100 a month — is important."
Earning Additional Income
If your emergency savings aren't enough to cover unforeseen expenses, Marquit suggests covering the expense the old-fashioned way. "I'm a big advocate of earning more money," she says. "Pick up a part-time job. Sell your stuff on an online marketplace. Start a freelancing gig on the side. Take surveys online."
Drawing From Retirement Savings Accounts
Marquit cautions against dipping into your 401(k) or other retirement savings account. "If you can avoid sacrificing your future for the present, that's best," she says.
In addition to potential penalties and tax consequences resulting from early withdrawal of money from a retirement account, there are other reasons to let that money percolate undisturbed.
"In most cases, your retirement account is protected from bankruptcy and creditor demands," she says. You don't want to lose the opportunity to have your retirement account earning money through appreciation and dividends.
Utilize Credit
Take advantage of any existing credit cards, and if you still need additional help, consider applying for a credit line increase, a new card, or a loan. However, be aware that difficulty paying for current expenses can make it harder to be approved for a new loan or a credit line increase.
Regardless of how you ultimately choose to cover an unexpected expense, the best thing you can do is carefully weigh all of your options before making a decision.
Gain additional tips on sourcing extra income.
