Personal Finance

What are your options when you don’t have any emergency fund?

Unexpected expenses can injure your financial life unless you have a fat cash cushion. Recently, when the government shutdown happened, people went through a short financial crisis due to lack of an emergency fund. And, there is no certainty that there won’t be a government shutdown in the next 2 years. There is no assurance that you won’t be any unexpected emergency situation in the near future.

What will you do if you lose your job suddenly? What will happen if you face an unexpected medical emergency? What will you do when there is no income for an extended period of time? How can you survive a financial crisis when you don’t have an emergency fund?

Let’s find out in this post.

1. Borrow from a credit union: When you don’t have an emergency fund, you can borrow a loan from a credit union at a low-interest rate. Typically, you have to pay a 3% interest rate on the loan, which is quite low.

Unlike payday loan companies, credit unions encourage individuals to save money on a regular basis. They give financial advice and suggestions to members so that they don’t get into debt problems. Plus, they avoid giving out loans that are beyond the affordability of borrowers.

2. Borrow a home equity line of credit: Do you have equity in your home? If so, then you can borrow a home equity loan from a lender to cover your emergency expenses. In case of a home equity line of credit, your house acts as the collateral against the loan. Make sure you pay off the loan at any cost. Otherwise, the bank will foreclose your property due to loan default. There is yet another problem with HELOC. The bank can cancel this loan anytime. In that case, you’ll be in a problem.

3. Borrow from the Roth IRA: You can borrow a loan against your Roth IRA without any penalty but that is applicable only when you’re below 59 and half years. You can borrow only the total amount deposited in the account.

What if you want to borrow the total amount along with the interest accumulated? You can borrow the amount. But in that case, you have to pay a heavy penalty.

If you’re already above 59 and a half years, then you can borrow any amount provided your account has been opened 5 years back.

What else can you do?

You can use liquidate your investment accounts when you’re in an emergency situation. If you have invested in stocks in the past, then you can sell them to get some cash. If you have kept money in brokerage accounts, then you can withdraw money from there. Usually, you don’t have to pay a penalty for withdrawing money from brokerage accounts. However, you have to pay tax on the total interest earned. Consult a tax professional to know how you can deal with the tax consequences.

Well, these are a few options you can try out when you don’t have an emergency fund. But I would always suggest you to save for the rainy days in the first place. This would help you avoid incurring fresh debts.