Do you have Financial Security in an Emergency

EFWe all have them. Emergencies happen all the time. We get in a car wreck, lose a job, the dog has to have surgery, the kids grow out of their clothes and we didn’t budget for it, Christmas is in December this year! Whatever you haven’t planned for in the future will become an emergency if it comes up and you don’t expect it. So what do you think is the best solution for an emergency that requires some financial commitment?  Let’s take a look at some of the ways people take care of their emergencies.broken-piggy-bank

Credit cards and bank loans:

Let’s start by looking at just a few statistics from creditcards.com.

  1. Average credit card debt per U.S. adult, excluding zero-balance cards and store cards: $4,878.
  2. Average debt per credit card that usually carries a balance: $8,220.
  3. Average debt per credit card that doesn’t usually carry a balance: $1,037.
  4. Average number of cards held by cardholders: 3.7 as of the end of 2009.
  5. Average APR on credit card with a balance on it: 13.11 in Aug. 2013.
  6. Total U.S. outstanding revolving debt: $846.9 billion as of Sept. 2013.
  7. Total U.S. outstanding consumer debt: $3.052 trillion as of Sept. 2013.
  8. Charge-off rate on credit card loans from top 100 banks: 3.87 percent as of Q1 2013.

 

Credit Card TrapI’d be willing to bet, a majority of Americans would pay for an emergency by using a credit card. Why? Maybe because 37% of low or medium income families have any kind of savings, and the ones who do have less than $1000 in the account. Dave Ramsey has stated that around 75%-85% of all emergencies could be handled with a $1000 emergency fund. If you fall in this category where you take care of an emergency with a credit card. Look above at the average APR on credit cards: 13.11% That’s $13.11 for every $100 you have to spend on the emergency! Now, I don’t know about you, but I do have more important things to spend my money on than the credit card companies’ pockets.

Borrow Money From Friends and Family

money-handsMore relationships have been ruined over financial fights than any other topic in the country. The divorce rate is up over 50% and over 50% of divorces are because of financial fights. If you borrow from a family member or friend, your relationship will change with that person, forever. You will either pay the money back as a responsible adult will do, or you will not pay the money back and rarely hear from that person again except when they want you to pay-up. The problem with the first is you might be borrowing the money from someone who will hold it over your head forever that they took care of you, and you owe them (even if you paid it all back, you’ll owe them a favor in return as well). Banks might charge you interest, but at least they don’t want a favor from you later on included in that loan. The latter, obviously, is just irresponsible childish behavior. I’m going to recommend not borrowing money, but if you do borrow money, make sure you pay it back in a timely fashion and don’t be the relative no one wants to see coming out of fear you’re going to ask for more.

Pull The Money from Retirement

Money in ToiletI’m pushing 30, not there yet, but close enough. 401Ks won’t allow you to have money pulled from them in full without penalty until you’re at least 65. If I have a $500 emergency and haven’t planned for it with an emergency fund, I have to get $500 from somewhere! We’ve already discussed 2 options: Credit Card with 13% interest rate or a loan from a family member who you may or may not ever want to talk to you again after finally paying them back. Here’s #3, you pull from retirement. Pulling $500 from retirement could cost you between $150-$300 depending on your tax bracket if you’re not over 65! Do I really have to explain to you why this is a bad idea?! Let’s just say you were taxed and penalized 50%, that $500 emergency cost you a total of $750. NO THANK YOU! How fast do you think your retirement will last if you continue having emergencies you haven’t planned for and don’t have a back up plan? If you’re thinking there isn’t another option besides this or going into debt with a credit card, bank loan, or family member, keep reading!

PULL FROM THE EMERGENCY FUND

Emergency Life Saver

In 2011, Time magazine reported 64% of American’s don’t even have $1000 in the bank for emergencies. Remember earlier when we stated 75-85% of emergencies could be covered by $1000 or less? I have to tell you, this is by far THE BEST way to take care of your family when you have an emergency. We’re currently working on paying off all of our debt, but of course, life happens. We’ve had emergencies that we wouldn’t have been able to pay for before when we were living like everyone else in America. We’ve had Dr. appointments, vet visits, car repairs, etc. and all of them were paid for in cash by having at least $1000 in the savings account. When you pull money from it, you repay yourself to get back up to your limit you’re keeping in the account. If you’re still in debt, keep $1000 in the bank. Dave Ramsey will tell you if you make less than a certain amount to cut that in half and leave $500 in the bank, but I respectfully disagree and here’s why. Life isn’t cheap!

  • My best example is a car mechanic. I have a great one in town, not the cheapest, but definitely one of the best in town and so far as I can tell, very honest. I took my truck to him (a little over 100K miles on it) to get my brakes replaced. We had about $150 saved for a brake repair, but then, the phone call. Mr. Waldrop, you have a bearing that needs to be packed and a CV Joint going out. Now unfortunately, I’ve worked with cars pretty much all my life in one fashion or another so I knew exactly what this meant and how my $150 was far from enough. Good news though, even though this was a pretty expensive repair, I was able to pay in cash for everything needed to keep my truck going and didn’t have to worry about where the money was going to come from later! Your life will change if you can pay for life in cash without worrying.

Do you stop there? Of course not, but I want you to start there. Get $1000 in the bank as fast as possible. Don’t eat out, don’t go shopping, don’t pay extra on debt, don’t do ANYTHING that isn’t a primary necessity in your life. Once you have that $1000 in a savings account at your bank. LEAVE IT ALONE! Don’t end the month low on funds and pull the money out of your emergency fund, that’s not what it’s for. This money is only for the unexpected events that happen in life like hospital visits, car repair, etc. We will discuss what to do after you get your beginner emergency fund of $1000 in later posts, but I want you to understand how just this small amount will change your life. If you don’t learn anything else, this is what I want you to learn.

 

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