Financial Options When Your Emergency Fund Has Dried up

A financial crisis can strike at any time, and many households across the country have tried to protect themselves by establishing an emergency fund to cover sudden costs. Having a cash cushion is a common piece of advice credit counselors, advisers and other professionals give to consumers. A money surplus individuals use to solely respond to an unexpected medical bill, repair or layoff shields them from being forced to drain savings accounts or tap into retirement funds.

Sometimes, however, a crisis may strike that not only forces people to use all of their emergency savings, but find ways to cover heavy remaining costs. When this occurs, consumers must weigh their options carefully to try to avoid debt.

As a general rule, whenever individuals are facing financial hardship, re-evaluating their budgets to cut back on spending is an effective way to stretch income. This includes clipping coupons, cutting down on eating out and scaling back on services, such as cable and cellphone service. For those in a severe money crunch, a significant downsize may be enough to help them keep their savings intact. For example, selling a new vehicle to purchase an older model can eliminate car payments, reduce insurance premiums and, in some cases, slash the amount they spend on gas. A cash flow problem may also warrant an impromptu sale of unwanted or unused items. Homeowners that have planned on decluttering their homes for years may earn money on the side by selling items online.

Last-case scenarios

If downsizing does not cover costs, consumers will have to make some difficult decisions about their assets. A credit counselor can help individuals analyze their current financial standing and determine which options may work best for their circumstances. For example, homeowners with significant equity and good credit may consider taking out a home equity loan or line of credit to hold them over until their circumstances change.

Homeowners who don’t have a great deal of equity and little savings also have the option of tapping into their retirement accounts. While investors may qualify for a hardship withdrawal from their 401(k)s, it’s important that they understand their distributions are taxable and, if under age 59 1/2, they may face tax penalties from the IRS. For this reason, making early withdrawals from retirement should be avoided except in dire circumstances.