Assess What You Have
The first step in managing financial crises is to understand the resources you have and what expenses you can cut. Even if it is unpleasant, review a complete financial picture, including:
– The amount remaining in your emergency fund
– The amount you earn from income, if any
– Your current budget and expenses
– Available credit that you can leverage
– Assets you can sell, borrow against, or lease
When facing a financial emergency, having options is crucial. A clear view of your financial picture allows you to identify options that can help you adapt and survive in your new circumstances.
Note: Avoid high-interest borrowing, such as consumer loans or loans without credit checks, as they can impose effective interest rates that reach triple digits.
Simplifying Expenses
You’re likely already cutting costs by shopping smarter for groceries, halting automatic contributions to retirement and savings accounts, and eliminating paid monthly services (cable, satellite radio, gym memberships). Some additional measures to reduce expenses include:
– Increasing self-contributions to cover insurance and reduce premiums
– Reducing tax withholding from your paycheck at work
– Negotiating new plans for mobile phone and internet services
– Transferring balances at 0% (be cautious of balance transfer fees)
Note: If you’re considering using a bill negotiation service, check the fees to ensure that any potential savings you achieve justify the cost.
Communicating with Creditors
Options are available from creditors and lenders to help manage your debts. Some possibilities worth exploring include:
– Deferring or managing student loans, including student loan relief options related to the COVID-19 pandemic
– Deferring mortgages or restructuring loans, including mortgage relief options related to the COVID-19 pandemic
– Skip payment programs for auto loans
– Hardship deferment programs for credit cards
COVID-19 Relief Measures
Some measures are applied automatically. For example, the CARES Act temporarily suspended payments on federal student loans until September 30, 2020, and reduced interest rates to 0% for eligible borrowers. President Joe Biden extended the deferral period until August 31, 2022.
The same relief for federally held family education loans (FFEL) has been extended until August 31, 2022. Any payments made by borrowers during the deferment will be refunded to the lender.
You may have additional protections if you live in a multi-family property financed by Fannie Mae or Freddie Mac. If the property owner defers payment, they cannot evict you during that period. They must also notify you if this is the case. They cannot impose late fees or penalties for non-payment of rent and must provide you with some flexibility in paying any overdue rent.
Note: Although no longer in effect, the Centers for Disease Control and Prevention had imposed an eviction moratorium for eligible individuals due to COVID-19 until October 3, 2021. To use this protection, you and every adult listed on the lease had to complete a declaration form detailing your financial situation and provide it to the property owner.
Consider Tapping into Your Assets
In some extreme cases, it may be necessary to take drastic measures. Look at your list of resources. Can you turn any of them into cash?
Your Home
For instance, if you own a home and have extra space, you might be able to rent it out for storage or lease. While renting out the space may be a good option for some, you should consider other options if it threatens your safety or that of your family.
Note:
Review the urban planning regulations in your city to ensure that any rental agreement you are considering (especially if it is short-term) is legal.
Selling your home to access the profits tied to it is another option, especially if you have a large mortgage payment or are no longer able to make mortgage payments.
Remember that your home is an investment, and its price is subject to appreciation and depreciation based on the general real estate market. If property values have risen significantly in your area, it might be wise to capitalize on those profits by selling your investment.
Retirement Accounts
If you have a 401(k) or an Individual Retirement Account (IRA), tapping into those assets might be an option, but only as a last resort and perhaps not even then. The CARES Act allowed for withdrawals of up to $100,000 from a 401(k) or IRA until December 30, 2020, without triggering the 10% early withdrawal penalty.
However, depleting retirement accounts can have significant negative consequences on long-term financial health. When you withdraw retirement funds early, you miss out on compound interest. Even if you repay the money later, you might not have enough time to make up for the growth you missed.
Note: If your situation is dire, consider that retirement accounts are generally protected during bankruptcy proceedings.
Finding Financial Assistance
Depending on your situation, you may qualify for assistance with utility bills, phone bills, cash assistance, and housing assistance. Programs worth exploring include:
– Supplemental Nutrition Assistance Program (SNAP)
– Women, Infants, and Children (WIC)
– Temporary Assistance for Needy Families (TANF)
– Low-Income Home Energy Assistance Program (LIHEAP)
– Section 8 Housing Choice Voucher Program
Kari Loors, a personal finance expert and founder of Money for the Mamas, recommends checking with your employer and your employee benefits package to see if there is assistance available, such as hardship grants and service plan discounts.
Most importantly, don’t rush if your savings are running low. “If you have an emergency and you don’t have an emergency fund, the first thing you should do is breathe,” says Loors. “You will find a way; it may take some effort.”
Sources:
– CNBC. “Nearly 14% of Americans Have Wiped Out Their Emergency Savings During the Pandemic: CNBC + Acorns Survey.”
– Congress.gov. “CARES Act,” Page 134 STAT. 404.
– The White House. “Statement by President Biden Extending the Pause on Student Loan Repayment Through August 31st, 2022.”
– Federal Student Aid. “COVID-19 Loan Payment Pause and 0% Interest.”
– Consumer Financial Protection Bureau. “Learn About Forbearance.”
– FHFA. “FHFA Extends COVID-19 Foreclosure and REO Eviction Moratoriums.”
– U.S. Department of Housing and Urban Development. “Mortgagee Letter 2021-15,” Page 1.
– Federal Housing Finance Agency. “FHFA Extends COVID-19 Multifamily Forbearance Through September 30, 2021.”
– Centers for Disease Control and Prevention. “CDC Issues Eviction Moratorium Order in Areas of Substantial and High Transmission.”
– Internal Revenue Service. “Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers.”
– Congress.gov. “S.256 – Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” Pages 119 STAT. 62-65.
Source: https://www.thebalancemoney.com/what-to-do-when-your-emergency-fund-runs-out-5084047
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