I want you to excel at finances, not make choices that might box you in or cost you buckets extra down the road.
But the fact is, you need to be aware of all the tools in your money toolbox so that you can make the best possible decisions for you and your family.
And that includes the tools I usually don’t like to talk about because they might not make long-term financial sense (but sure as heck can help you out of a money bind).
As much as I love to tout the many benefits and virtues of owning an emergency fund (probably because I’ve been on the lucky end of needing one and actually having it to tap in my twenties), I know that you may not have one. And if you do have one, it may not be fully funded.
So when the next emergency hits…are you screwed? Probably not.
Let me be very clear: you need an emergency fund.
This article is not meant to justify surviving the rest of your life without one. However, there has to be other backup plans for the millions of Americans who do not possess one.
Let’s take a look at some Plan B’s.
Get Thee Awesome Insurance Coverage
Insurance is an important protection for all of us. But if you don’t have an emergency fund, then you best make double sure you have excellent insurance coverage. In the 5 months that half of our household was unemployed, when we slashed spending on almost everything, we never once considered ditching any of our insurance policies. The fact is, one accident, health issue, or deadly rain storm could have taken us out of a precarious situation and into a downright financially devastating one.
Don’t put yourself in that situation.
And guess what? You need to at least set aside an emergency savings consisting of enough to cover your insurance deductibles. So add those babies up and see how much that comes to. For us, we have a $1,000 flood insurance deductible, and $500 deductibles on both of our vehicles (I’ll have to check and see what our homeowner’s insurance deductible is).
Give Yourself the Gift of Financial Flexibility
You may have some financial obligations – like a mortgage, student loan debt, credit card debt, etc. – that don’t care if you are in dire straits or bathing in ten-dollar bills. In times of need, it can be helpful to lean on built-in financial flexibility.
The way to do this is to lengthen your loan terms whenever it’s possible to do so without *bad* financial repercussions. Such as:
- Go with a 15, 20, or 30-year Mortgage Loan: You will almost certainly have a higher interest rate for choosing one of these instead of a 10-year mortgage term. However, your loan payment each month should be more comfortable and easier to shoulder in the event of an emergency.
- Extend Your Federal Student Loan Repayment Period: There are typically four options for extending federal student loan payments, including graduated repayment, income-sensitive repayment, extended repayment and loan consolidation. By extending your repayment period, the monthly amount you are liable for will be less.
The thing is, even though you extend your loan lines to decrease monthly payments in the event that you need to go down to bare-bones spending, you can still send in extra payments and pay off the loan in the amount of time that you wanted to anyway.
Note: Extending your repayment loan term has the consequence of increasing the amount of interest you will pay over the life of the loan. So when you get a fully funded emergency fund, start sending in extra payments to make up for this!
Choose a Roth IRA as One of Your Retirement Accounts
Did you know that if you invest in a Roth IRA retirement account, any of the money you put in there you can withdrawal at no penalty to you? You cannot withdrawal the earnings of that money without a penalty, and you also will not be able to replenish that money after you are back on your feet. However, in extreme circumstances, this could be an option for you.
Note: I loathe the idea of tapping retirement accounts – money you are going to need when you are older – to pay for things now. So I want to emphasize that I am only putting this option out there because sometimes, you might be out of options.
CYA with Established Credit Lines
One way to get you out of an emergency (when you don’t have an emergency fund) is to make sure you have an established credit line in place before you need to use it.
Let me be clear about this one: I never want someone to go into debt. Ever. In fact, my stance is just the opposite; I help people get out of debt in the most efficient and quickest way possible.
But if you don’t have an emergency fund, then you might be out of options (and please, exhaust all possibilities before using this one).
The thing is, building an emergency fund is not as annoying as you’d think. So get started! Today is better than next week, and yesterday was better than today. In the meantime, fingers crossed that you don’t need to use any of these tools above.
Are you wondering how you can possibly save for an emergency fund, or not sure how much is considered “fully funded” for your particular situation? Sign-up for your freebie below and be the first to hear about my upcoming course: Save Beyond Your Means.