Emergencies are sometimes unavoidable. You may have the best laid financial plans, but if you’re hit with an unexpected expense like major damage to your home due to a weather event, or a large hospital bill thanks to an accident, or a lack of income due to sudden unemployment or disability, your plans may quickly evaporate.
A smart investor has money in the bank reserved just for emergencies, but one catastrophic event could eat up all the emergency fund money and leave you needing more.
You certainly could tap your investments, but in general, this should be considered a last resort, not only because you lose the power of compounding interest when you withdraw your money, but because there can also be significant tax obligations that you may not be able or willing to handle if you’re already strapped for cash.
Before you tap your investments, consider other alternatives to get the money you need.
1. Negotiate with those you owe. If you owe money to a hospital, for instance, see if they will be willing to negotiate how much you owe, or at the very least, put you on a payment plan. This will make the financial burden easier to bear.
2. Seek a short term loan. There are a range of personal loans available, and you’ll likely find the interest rate quite manageable. You can also inquire about a short term loan of a year or less or a longer one, depending on how much money you need and your financial circumstances. You can use a loans calculator online to determine what repayment plan you can best afford.
3. Use your credit cards. Many credit cards charge a high interest rate, so this should be one of your last choices, but it does leave you free of the tax burden you might face if you cashed out your investments. If you’re unable to pay off the credit card right away, you could always shop around for a card that offers a 0% interest rate and transfer your balance. Then all the money you repay monthly goes right to the principal.
If you’re facing a sudden financial crisis, know that there are several ways to pay what you owe without dipping into your investments. Before you borrow any money, however, make sure to try to negotiate with your creditor. You may even find that the creditor agrees to reduce the amount you owe.