Here's what to do when your emergency fund runs out
Tania P. Brown is a certified financial planner (CFP) & Financial Coach for SaverLife, a national nonprofit fintech that helps working families achieve prosperity through savings.
Millions of Americans are facing financial hardships during the coronavirus pandemic, including job loss and reduced income. As a result, many are depleting or have exhausted the emergency funds they had saved up to help them through rough times.
But many still remain in distress, so what can they do now?
Tania Brown, a certified financial planner, answers questions about emergency funds and what to do next if yours has gone dry.
What is a good number to have in an emergency fund (taking into account coronavirus and how it’s affected people financially)?
A rule of thumb for emergency funds is to save:
3 months of expenses when:
You have a job where you can find work quickly for similar income.
You and your spouse make about the same amount of money.
6 months of expenses when:
You are self-employed.
It’s hard to find work in your field.
You are the family’s breadwinner.
How important is it to review your budget when your emergency fund runs out? What tips do you have for cutting expenses if necessary?
It’s critical to continuously review your budget when you no longer have emergency funds. Your dollars now have to meet current and future unexpected expenses. Life is not going to pause because your emergency fund is at $0. You will still have car repairs, home repairs, and other unexpected expenses.
I suggest creating a “Crisis Budget.” This is the minimum you need to survive if you have a drop in income. It should cover what I sometimes call the “Quad of Stability:” food, shelter, transportation, and medical coverage, especially in our COVID-19 world.
Cutting back is starting with the following low-hanging fruit:
Decreasing or eliminating cable
Downgrading cell phone services
Canceling memberships
Contacting your utility providers and asking about programs to lower costs
If you still cannot pay bills, it’s cutting back on lifestyle choices. This may mean moving to a cheaper, smaller place or going down to one car.
If someone has debt and no emergency fund, what's the best way to handle it? For example, should they ask for a hardship program from credit card companies, deferment or forbearance of student loans, temporary mortgage forbearance, etc.?
If they can pay their debts, I suggest paying the bare minimum and focusing on building an emergency fund. Cut expenses drastically.
The next action would be to reach out to your non-creditor bills listed below and explain your financial situation and ask for assistance.
Utilities
Cable
Cell phone
Insurance
If someone still cannot afford to pay, then contact your creditors and ask for help. The key is to remember that a pause is not forgiveness, as you will eventually have to pay deferred payments back.
Get any arrangements in writing. Find out how your arrangement will be reported to the credit bureaus, the timeframe of deferred payment, and repayment terms.
The last thing you want is to get a three-month break from paying a bill to owe the entire amount in full the day you are expected to repay. I cannot overemphasize the importance of knowing the terms of any deferral arrangements made with creditors.
If you have zero emergency cash, is it a good idea to tap retirement accounts, cash-value life insurance, home equity? What are the pros and cons of doing so?
If you have no emergency savings, but you can pay your bills, and you do not have an immediate cash need, then avoid taking money out of your retirement plan, cash-value life insurance, or home equity.
Taking money from these areas means sacrificing your future for your current situation in reduced retirement savings, life insurance and having more debt (401k loan or home equity payment in the future.) You do not want to compromise your future to satisfy a present, temporary need.
Please share any other unique tips for managing finances once your emergency fund runs out.
The most untapped financial resource most people have and is underused is themselves. A business buys or sells a product or service for a profit. If you get a paycheck, that means you have a marketable skill. The key is having enough faith in yourself to tap into that skill, cut out the middleman (a corporation), and directly find people who need your skills.
A business having an online presence is now a means of survival. Skills such as website building, website troubleshooting, proofreading, creating graphics, writing, virtual assistants, social media expertise are needed.
If you’re great with kids, offer to host groups where kids can get together to work online, giving parents working from home a needed break. Get on websites like Fiverr and research what skills freelancers are advertising and research online business owners’ needs. Join business Facebook groups. In every crisis, there’s an opportunity.
Take advantage of the time at home, the increased number of free online classes and upgrade your skills so you can increase your income.
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