My family recently experienced a medical situation somewhat out-of-the-blue. Fortunately, everyone was okay. But when we received the bill, we were surprised at the amount. If we hadn’t been covered by health insurance, the medical care would have cost more than $50,000. I was shocked. Even with my planning, I’ve never amassed an emergency savings fund that would have easily covered $50,000. It made me wonder what people can do when they are hit with a sudden financial hardship.
Reduce Spending
When you face a sudden bill or even lose your job, you will need to change your spending pattern. If you have a current budget, you can easily determine areas you can cut. Focus on must haves – your most pressing needs – like rent or mortgage payments, utilities, food, transportation, and medical care. Immediately cancel or place on-hold subscriptions and other expenses that are more nice-to-haves than needs.
This is the time to use the emergency fund
People often ask me what is a true emergency and when they should consider tapping their savings. If you are considering putting necessities on a credit card because of a hardship, this is a good sign that you should use part or all of your emergency fund. Notice I said necessities. If your rent is about to go on a credit card because you can’t make the payment, use your emergency fund. But as I mentioned above, even the best laid plans might not cover a surprise bill or job loss.
Increase your income
Oftentimes with a health situation, you aren’t able to work (or must work less) so this might be a non-starter. However, if you are able, consider taking on another job on nights or weekends. This could include a part-time situation at another company like yours or helping stock a retail store in the late evening hours. This isn’t the time to be shy. Talk to friends and get the word out that you’re looking for something to supplement your income.
Contact your creditors
If you can no longer afford your mortgage payment, don’t just assume you’re doomed, especially if you have a history of on-time payments. Contact your lender and explain the situation to see if they can temporarily reduce your payment or even suspend it for several months.
Do this with any creditor, including your credit card company or auto financier. Creditors are much more willing to work with you if you let them know ahead of time that you may have problems paying versus if you wait until you’ve missed two months of payments.
Search for sources of help
There are many people in the US who don’t have enough to eat. That’s an awful fact of life. This means there are food kitchens and free supplies available in most major cities in the US. If this is a need of yours, find the local services that can help you. Utility companies often have programs where they can help people who can’t pay their bills. You can even contact friends to cook meals together thereby reducing the cost of ingredients. Your friends or relatives may also be willing to provide short-term child care.
Carefully consider loans
If you own a house, you may choose to investigate a home equity line of credit. While interest rates are higher on these loans than in the past, they are substantially lower than credit card interest. If there’s some flexibility in the timing of your needs, you could also investigate refinancing if rates have lowered enough to make this a smart decision. Just know that refinancing will take weeks before you actually see a lower mortgage payment.
Retirement account as last resort
Retirement accounts like 401ks offer the ability to take a hardship withdrawal or a loan from the account. Many people consider this as option one when they are having issues. Financial planners suggest you consider this as a last resort though. A hardship withdrawal will permanently decrease your retirement plan balance, which could set your retirement back by decades. Even paying back a loan will hurt your ability to retire. These options are available if truly needed, but consider other options first and talk with a trusted advisor before making this move.
Hardships can hit anyone, through no fault of their own. Even people who have planned and saved can get broadsided by the size of a bill or an untimely job loss. Taking quick actions can help you manage the loss and get back on your feet again.
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