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When emergencies happen, you may have to spend money that you hadn’t planned to spend. Most people have a few options, so you should weight the pros and cons of each one before making a payment.
Most advisers recommend putting three to six months of expenses in an emergency fund. Ideally, the emergency fund will support you if you lose your job or cannot work for a significant period. When you desperately need to pay for car repairs, medical treatments, or other essential services, though, you can dip into your emergency savings.
The benefit of keeping an emergency savings account is that you get to avoid the interest associated with charging something on credit. In fact, you can grow your emergency savings by keeping it in an account that earns interest.
By tapping into your emergency fund, though, you chip away at the savings you have for true emergencies. If you have to use the money in your emergency fund, try to replace as soon as possible. There are a few tricks you can use to build your emergency fund quickly and painlessly.
Unfortunately, most Americans don’t have enough savings to pay for expensive emergencies. If you have more than $5,200 saved, then you’re doing better than most households even though you still don’t have enough to cover three months of expenses.
If you don’t have enough money to pay for an emergency expense, then you may need to use a credit card. The downside of using a credit card is that you will have to pay interest. On average, credit cards charge about 17% APR. Your card, however, may charge a higher rate.
Even with a 17% APR, you’ll spend a lot of money repaying your emergency expense. Let’s assume that you use the credit card to pay for a $3,000 car repair. Paying $500 per month will mean that you spend $158 in interest.
On the other hand, credit cards are a convenient way to pay for emergencies when you don’t have cash. You can also avoid interest by repaying the balance before your next payment date. If you do find you’ve run up a credit card balance, take a look at some ways to get it under control.
Personal loans typically have lower interest rates than credit cards. People with excellent credit can often find personal loans that charge 5%. People with bad credit, however, may need to pay nearly 40%, if they get approved at all.
Getting a personal loan also takes time. You need to fill out an application and wait for a response. Many people find that it’s just easier to use their credit cards. If you have a few days to pay for your emergency expense, though, you should try to get a personal loan from your bank or one of the better online lenders. Doing so should help you avoid high interest rates.
If you have cash, use it for your emergency expense. Otherwise, try a personal loan. Finally, turn to your credit card.