As hard as we all try to properly manage our finances, sometimes things happen. You spend more than you probably should have. You receive an unplanned medical bill that insurance didn’t cover. Something in your house breaks causing thousands of dollars to repair.
In all of these cases, you can go from being “okay” financially to tight in an instant. This is especially true if you’re already living paycheck to paycheck. However, that doesn’t mean you have to give up or turn to high-interest debt. You can get back on your feet by using any of the following strategies.
Cut Back on Non-Essential Expenses
I know … budgeting is both the hardest and easiest tip for most people to implement.
It’s hard in the sense that no one likes making cutbacks. You work hard for your money and deserve every dollar you’ve earned. For that reason, when someone says you can’t buy a coffee or make a discretionary purchase, it’s frustrating!
However, this is also the easiest step to take because, believe it or not, budgeting is 100% within your control. Despite what you may think, your budget is whatever you make of it. No one tells you how to manage your money. You either spend it with intention or because those are just the habits you’ve developed over time.
When most people dig deeper into the transactions they’re making, they’re generally very surprised at how much extra “fluff” there is. That’s valuable to know because it’s where adjustments can be made – especially if money is tight and you’re having to make hard choices between essentials.
An easy way to take a closer look at your spending habits is to keep track of your transactions. You don’t have to save every receipt or count every penny. You can use a budgeting app like Buxfer to track and organize your purchases for you automatically. That way you’ll get a realistic picture of where your money is going every month and where some potential improvements are possible.
Negotiate with Your Creditors
Getting bills in the mail that you’re going to struggle to pay from faceless companies can seem like a losing battle. Yet, something a lot of people don’t realize is that often there are real people working at those companies who have the power to change your payment terms with the click of a mouse. If you call them up and kindly explain your situation to them, you might just save yourself a lot of heartache.
Companies want to get paid back just the same as you and I would. It’s not good for them to write your account off as a loss and hand it over to collections. Therefore, if you can explain to them the problems you’re having financially and what you can offer, they might be willing to give you a break. Getting their money back slowly or at least a portion of it is better than getting nothing at all.
For instance, I’ve heard stories of people who received a large medical bill in the mail. Since they didn’t have enough money in the bank to pay for it all at once, they called the medical provider and asked if it could be broken up into smaller payments. The company agreed to spread it over a 24-month period with little to no interest, so it quickly became more digestible.
Take a Hardship Withdrawal from a Retirement Plan
In some situations, you won’t be able to delay making a payment. Doing so might have consequences like losing your car or being kicked out of your home. Rather than racking up high-interest debt, a better solution would be to pull money out of a retirement plan like an IRA or 401(k).
Although I generally discourage people from dipping prematurely into their retirement plans, I do concede that in true emergency situations, it’s better to not risk your safety and well-being at the cost of putting off your retirement for a few more years. Most tax-deferred retirement plans like traditional IRAs and 401(k)s do come with an early withdrawal penalty of 10% if any money is taken out before age 59-1/2. However, this 10% penalty can be side-stepped if the reason you’re dipping into your account counts as a qualified hardship withdrawal.
Common qualified hardship withdrawals include:
- Medical care or medical costs
- Preventing the foreclosure of a principal residence or eviction
- Funeral or burial expense
- Purchase of a principal residence
(Note that no matter if the withdrawal is qualified or not, you’ll still have to claim it as income on your tax refund and pay regular taxes on it.)
The other approach you could use is to borrow money from your 401(k) plan. This is where the IRS permits the accountholder to borrow up to $50,000 or 50 percent of the vested account balance (whichever is less). The money then has to be paid back with interest over the next 5 years. Note that borrowing from an IRA is not allowed by the IRS.
If you’ve got any Roth-style accounts, then there’s good news: the principal part (i.e., the money you contributed) is available tax and penalty-free. Only the earnings portion (i.e., the money that grew on top of your contributions) has to wait until age 59-1/2.
Consider Accessing Your Home Equity
Another way to come up with cash fast if it’s needed is to tap the equity in your home. Equity is the portion of your house that you own. Essentially, it’s the money you’d get to keep if you sold your house tomorrow and paid off the remaining mortgage.
Many homeowners have consistently made mortgage payments for a decade or so. That means they’ve built up a lot of equity in their homes. To access this resource, they can apply for one of two types of loans:
- Home equity loan – The homeowner borrows a lump sum of the equity in their home. In exchange, they make fixed monthly payments with interest over the next 5 to 20 years.
- HELOC (home equity line of credit) – HELOCs turn the homeowner’s equity into credit that they can use as they please (like a credit card). During the draw period, they’re only required to pay interest on any money that they withdraw. After 5 to 15 years, the repayment period starts and any remaining balance must be repaid in fixed monthly installments.
What’s important to remember is that with both types of loans, your home will serve as collateral. That means that if at any time you’re not able to make your payments, you could risk losing your property. This is why it’s important to only borrow the minimum amount needed and not overextend yourself. For this reason, it may be better to utilize a HELOC as long as you can be disciplined about only using funds when it’s truly needed.
Connect with a Financial Counseling Service
If struggling financially is a recurring problem and you simply don’t know where to turn next, then there are resources that can help. Two well-known ones include:
- National Foundation for Credit Counseling (NFCC.org)
- Financial Counseling Association of America (FCAA.org)
Both organizations have partnered with several different agencies across America. They also require them to be accredited.
The goal of these organizations is to offer free debt and credit counseling to anyone who needs it. Services are usually available through the website, by phone, or sometimes in person (depending on where you live).
Although some people might feel embarrassed to reach out for help, they shouldn’t. It’s better to get professional guidance than to suffer alone with nowhere to turn. If you’ve found yourself in this situation, don’t delay – get the help you need.
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