The National
Foundation for Credit Counseling’s (NFCC’s) July online poll revealed that 64
percent of Americans would utilize a source other than their savings account to
satisfy a $1,000 unplanned expense.The largest
number of respondents (36 percent) said they would tap their savings account to
fund the unplanned expense. Utilizing
rainy day funds for an emergency is exactly why a person saves, to protect them
against the unknown. However, the
remaining 64 percent are in a much different situation, living on a slippery
financial slope.
“Without
adequate savings, consumers have poor resolution choices when an emergency
arises,” said Gail Cunningham, spokesperson for the NFCC. “People often say they can’t afford to save,
but the truth is that they can’t afford not to.”
The survey
revealed that to resolve the problem, 17 percent of respondents indicated they
would borrow the money from friends or family.
Asking those close to you for a loan can be awkward, and potentially
negatively impact the relationship.
Further, it can lead to “serial borrowing,” with the borrower always
leaning on someone else to solve his or her financial problems.
Perhaps even
more troubling is that another 17 percent said they would neglect existing
obligations in order to satisfy the emergency need. This option can easily snowball out of
control and have serious consequences.
Skipping the rent or mortgage payment, and neglecting to pay credit cards
or loans will cause penalty fees and interest to be added to the debt.
Neglecting debt payments will also add negative marks on the credit report,
resulting in a lower credit score.
The next
highest number of responses was in the category of selling or pawning assets,
with 12 percent choosing this option.
Disposing of unwanted or unused items can be a positive way to raise
funds.
Taking out a
loan or obtaining a cash advance from a credit card were each selected by nine
percent of respondents. The low number
of individuals choosing these categories could indicate a lack of access to
credit, which might be a good thing. Taking
on new debt would put stress on existing obligations, the last thing someone in
a financial crisis needs to do.
“Selecting
any option other than taking the money from savings should be a red flag,”
continued Cunningham. “If saving money
has always seemed out of reach, there is no better time than now to get to the
root of the problem and protect yourself, your family and your financial future.”
WHAT TO DO?
Dorothy
Barrick, GreenPath group manager and counselor, provided a list of topics and
questions to ask:
Determine
if it is really an emergency.
If you need
your car repaired, will they allow you to pay the bill in installments?
Will your
doctor or dentist work with you to repay a procedure?
Will your
utility accept a payment plan?
Can you
delay the emergency by a week or so?
Trim the
budget shortfall for the emergency.
Can you buy
the car part or tire at an auto salvage yard instead of a repair shop?
Can you trim
other areas in your budget so that you can generate funds for the
emergency?
Eliminate a
land phone if you have a cell phone? Use
free television and eliminate cable?
Generate
funds.
Look at your
payroll deductions. If your next
paycheck will not cover the emergency, can you stop contributing to your
pension for a while?
Consider
having a garage sale or selling unwanted items on the internet. Your junk might just be a treasure to a
buyer.
Consider a
2nd job. Childcare or dog sitting? Tutoring?
House cleaning?
Ask
friends first.
Ask your
employer if they can lend you money that can be later deducted from your
paycheck.
Talk to
friends or family to see if they will lend you money. You may be more successful if you offer to
put the terms of the loan in writing.
Go to your
local bank and credit union to see if they will offer a ninety-day loan.
Consider
expensive options last.
When
emergencies happen and you find yourself without money in the bank, avoid
payday loan companies who typically charge an expensive transaction fee. Since the loan typically needs to be paid back by your next payday,
this is very expensive. Try to also
avoid the pawn shops. Losing your
collateral if you cannot repay the loan is also extremely expensive.