The Best Ways to Cope With a Financial Emergency
- A financial emergency could strike at any time.
- Assess the situation, then consider whether you can use emergency savings, cut your spending, or bring in some extra income to cover the cost.
- If you need to borrow money, run the numbers before making a decision.
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A financial emergency could come at any time, without much warning. Even maintaining a monthly budget and careful spending can't stop an unexpected home or car repair or emergency vet bill.
When you’re faced with a surprise expense, it’s easy to panic. Instead of fixating on the worst-case scenarios, take a deep breath. You can figure out a game plan, one step at a time.
Not sure how to get started? Here are some steps for coping with a financial emergency.
1. Assess the Situation
In a financial emergency, the extent of the cost may or may not be obvious at first. It’s one thing if you’re looking at a car repair with a $2,200 estimate. But if your home needs repairs, you may also have to pay for staying at a hotel while the work is being done, or for takeout meals if you can’t use your kitchen. Or in the event of a medical emergency, you may have more than just hospital bills. You might also be out of work for a while.
Your first step: Figure out how much money you need to deal with the most urgent matter at hand. Then, crunch the numbers to estimate the cost of the entire problem.
Once you’ve done that, see how much time you have to come up with the money, because the timeline could dictate your next steps. For example, if you’re looking at emergency surgery for your pet, the animal hospital may have a low- or no-interest payment plan.
So, in a financial emergency, first figure out what you’re dealing with in terms of cost and timeline. Fully informed, you can look at options for coming up with the money.
2. Review Your Emergency Fund
If you have an emergency fund, a financial emergency is exactly the right time to use it. Even having a small emergency fund could give you more options for how you deal with a larger unexpected cost.
Figure out if your emergency fund can cover the expense entirely. Don’t be afraid to use it up—this is what it’s there for. If you deplete your savings, you can always rebuild, and it’s usually a better option than resorting to debt right away.
3. See How Much Spending You Can Cut
What if your emergency fund doesn't have enough to cover the cost? If you have a little time to come up with the money, commit to cutting some expenses to save up the funds. That could mean not eating out and canceling cable TV for a while. It could also mean shopping for food very carefully to reduce your costs.
Even if your emergency fund covers all or most of the cost of your financial emergency, you might consider reducing your spending to help you replenish your emergency fund afterward. The less you spend in the coming weeks and months, the easier it should be to rebuild your savings.
4. See How Much Extra Income You Can Earn
If you don’t need to fork over all of the money for your financial emergency right away, another option may be to work a side hustle or get a second job temporarily. You could use the extra money to pay off your emergency expense, potentially sparing yourself from reducing your regular spending too drastically or emptying your emergency fund.
If you don’t have an emergency fund, once you’ve covered the cost of your financial emergency, you may want to stick with that side gig until you build up a cash reserve. That should give you a cushion for the next time an emergency happens.
5. Figure Out the Most Affordable Way to Borrow
If you need to pay for your financial emergency right away and you don’t have enough to cover the bill, you may need to borrow money. If that’s the case, review your options with the goal of finding the most affordable way to borrow.
Consider both the monthly payment and the total cost of borrowing. This means looking at the interest rate and how long it will take to pay off your debt. Balance an affordable monthly payment with the lowest possible total interest and fees.
Here are a few ways you could borrow money for a financial emergency:
Family loan. A low or no interest loan from a friend or family member could be the most affordable way to cover an emergency. Just make sure you have a firm plan—and a manageable timeline—for repayment.
Personal loan. A personal loan lets you borrow money for just about any purpose. Your rate will largely depend on your credit score. Credit unions and online lenders often have the best rates with the most flexible terms.
Home equity loan. If you own a home, you may be able to borrow affordably with a home equity loan or HELOC (home equity line of credit). It uses your home's equity (its value over what you owe) as collateral, or security for the loan. Be sure you can make the payments, as your home could be at risk if you don't repay the loan.
Credit card. Using a credit card offers convenience, but the interest rate can be very high. If you have good credit, consider a credit card with a 0% introductory APR so you don’t rack up interest on your balance for a while. Note that if you can’t pay your balance off by the end of your 0% introductory period, the interest rate on the remaining debt could soar. Plan to pay it off before then if you can to avoid high interest fees.
If you’re borrowing money to cover a financial emergency, it’s a good idea to simultaneously reduce your spending and/or earn extra income. That could make it possible to repay your loan or credit card balance as quickly as possible.
Author Information
Written by
Maurie Backman
Maurie Backman is a personal finance writer with over 10 years of experience. Her coverage areas include retirement, investing, real estate, and credit and debt management.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
How much money should I have in my emergency fund?
Start with a goal of saving $1,000, or even $500. The next level could be enough to cover all your expenses for three months without any money coming in. Eventually, you want to build this up to six months' worth. This is going to take time, and unexpected expenses will occasionally prevent you from saving. That's why your goals should be milestones, not a faraway finish line.
How do I save for an emergency fund?
Start small, and build it up over time. Set aside money every week, even if it's just a few dollars, before you spend money on the items in your budget. People who hope to save whatever's left over after spending often find that there's nothing left. So pay yourself first.
Where should I keep my emergency fund?
Your emergency fund should be immediately accessible without a penalty. That would usually mean in a savings account at a bank or credit union. Choose a high-yield savings account so that you can earn interest while you save. Online banks tend to pay the most interest on savings.