Most financial experts recommend saving at least 3-6 months of your income as an emergency fund. That's a lot of money but I can't disagree with them. Most of us generally have health insurance coverage, auto insurance coverage, home insurance coverage, appliance warranty plans and credit cards. Because of these we may think we don't even need to maintain an emergency fund. Is that true? I don't know. What I know for sure is its hard to guesstimate when we will have an unexpected expense and in which form. In short we will never know when we need emergency fund but we all know we need it one day. So be prepared for it. When you are in need of an emergency fund what are your options? how soon can you get access to the funds? etc...
Here is my list: (in the order of preference)
1) Checking/Savings account - If not 6 months, save at least 1 month of your income in your checking or savings account. You should be able to have access to these funds within minutes. These 1 month savings might not be enough to pull you out of crisis but many times they will buy you time before you look around for other options. When you are out of crisis plan on funding this account again.
2) Fixed Deposits or CDs - Plan on early withdrawal from your fixed deposits or multiple year CDs. There might be early withdrawal penalties where you might lose some interest but there will never be loss of principal. In most cases you should be able to access these funds with in 2-3 days.
3) Selling shares - This is tough to do especially when the market is down. No one wants to sell shares for a loss but we are talking about an emergency fund here. It will take anywhere from 5-7 days to have access to these funds.
5) Auto Loans - If you have a vehicle with no lien you have an option to finance the vehicle. Auto loans are approved very quickly these days and the interest rates are very cheap. You can have access to the funds in less than a week.
4) Traditional 401K - You can take up to 50% of your balance or $50K , which ever is less, from your 401K account. Access to these funds will take anywhere from 7-10 days. But remember you will have to do monthly payments and a small administration fee which can be spread over 5 years maximum. If you haven't started doing 401K contributions it might be a good idea to start now. See my detail post on how you can use 401K balances as reserves. Only plus point in this option is borrowers pay interest to themselves.
6) Home Equity/HELOC - You can tap your equity in home by applying for loans against it. Only drawback is it will take anywhere from 30-60 days to have access to the funds because of the long process involved in loan approval. May be by that time you will even be out of crisis. Only plus point in this option is the interest you pay may be tax deductible.
7) Personal Loans - I personally don't like this option because it is expensive if your credit history is not great. But if you are in need you have this option of applying for personal loans where interest rates and terms will be more favorable than a credit card cash advance. These loans are approved solely based on your credit history and access to these funds can take anywhere from 2-3 weeks.
8) Borrowing from friends and family - Yeah, it definitely sounds awkward but do it when you are in emergency. Don't forget to pay back when you are out of crisis though.
9) Credit Card Cash Advance - No! Don't! Never! Most people prefer to go with this option because of the ease and very quick access to the money. The costs associated with this option are outrageous and very well underestimated. I wish I didn't even list this as an option. But if you have used all the above options and reached this far I think you should examine your finances carefully and start planning better once you are out of crisis. You definitely don't want to end up with this option again!
None of these options are ideal but if you are in a crisis consider above listed options. Important: If you are thinking about using options #7, #8 & #9 you should consider it as a sign that your financial planning needs some fine tuning. Feel free to share your thoughts or new options in comments section.
If you find this interesting, please consider social sharing. Thanks!
1) Checking/Savings account - If not 6 months, save at least 1 month of your income in your checking or savings account. You should be able to have access to these funds within minutes. These 1 month savings might not be enough to pull you out of crisis but many times they will buy you time before you look around for other options. When you are out of crisis plan on funding this account again.
2) Fixed Deposits or CDs - Plan on early withdrawal from your fixed deposits or multiple year CDs. There might be early withdrawal penalties where you might lose some interest but there will never be loss of principal. In most cases you should be able to access these funds with in 2-3 days.
3) Selling shares - This is tough to do especially when the market is down. No one wants to sell shares for a loss but we are talking about an emergency fund here. It will take anywhere from 5-7 days to have access to these funds.
5) Auto Loans - If you have a vehicle with no lien you have an option to finance the vehicle. Auto loans are approved very quickly these days and the interest rates are very cheap. You can have access to the funds in less than a week.
4) Traditional 401K - You can take up to 50% of your balance or $50K , which ever is less, from your 401K account. Access to these funds will take anywhere from 7-10 days. But remember you will have to do monthly payments and a small administration fee which can be spread over 5 years maximum. If you haven't started doing 401K contributions it might be a good idea to start now. See my detail post on how you can use 401K balances as reserves. Only plus point in this option is borrowers pay interest to themselves.
6) Home Equity/HELOC - You can tap your equity in home by applying for loans against it. Only drawback is it will take anywhere from 30-60 days to have access to the funds because of the long process involved in loan approval. May be by that time you will even be out of crisis. Only plus point in this option is the interest you pay may be tax deductible.
7) Personal Loans - I personally don't like this option because it is expensive if your credit history is not great. But if you are in need you have this option of applying for personal loans where interest rates and terms will be more favorable than a credit card cash advance. These loans are approved solely based on your credit history and access to these funds can take anywhere from 2-3 weeks.
8) Borrowing from friends and family - Yeah, it definitely sounds awkward but do it when you are in emergency. Don't forget to pay back when you are out of crisis though.
9) Credit Card Cash Advance - No! Don't! Never! Most people prefer to go with this option because of the ease and very quick access to the money. The costs associated with this option are outrageous and very well underestimated. I wish I didn't even list this as an option. But if you have used all the above options and reached this far I think you should examine your finances carefully and start planning better once you are out of crisis. You definitely don't want to end up with this option again!
None of these options are ideal but if you are in a crisis consider above listed options. Important: If you are thinking about using options #7, #8 & #9 you should consider it as a sign that your financial planning needs some fine tuning. Feel free to share your thoughts or new options in comments section.
If you find this interesting, please consider social sharing. Thanks!
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