Whether it’s an unexpected car repair or an emergency room visit, life happens. And it’s expensive. For those without any kind of safety net, paying for unanticipated expenses can mean borrowing money at astronomical interest rates, as well as forking over late fees if you can’t make payments on time.
And while surveys indicate that there are plenty of people in just such a situation, there are some inexpensive and safe ways to access emergency funds.
In a May 2023 report on the economic well-being of US households, the Federal Reserve reported that only 63% of Americans said they would pay an unexpected $400 expense with their own cash or cash equivalent (e.g. putting it on a credit card but paying that bill in full when it comes due). Of the remaining 37%, most indicated they would borrow the money (using everything from credit cards to payday loans to friends or family). Some said they would sell something to foot the bill. And 13% indicated they simply would not be able to pay it.
Another survey, released by Bankrate.com in January, found that only 44% of US adults said they could pay a $1,000 emergency expense from their savings, while 35% indicated they would have to borrow the money. In that latter group, 21% said they would finance it with a credit card; 10% would borrow the money from family or friends, and 4% say they would take out a personal loan. Another 16% say they would have to reduce their spending on other things.
An earlier survey by Bankrate, meanwhile, found that two-thirds of US adults worried they don’t have enough emergency savings to cover them if they lost their primary source of income. Typically, that would mean at least three months’ worth of living expenses.
Low-cost ways to handle emergency expenses
Credit card interest rates remain sky-high — the average at the end of February was 20.75%, according to Bankrate.com, with average penalty rates pushing 30%. So simply charging an emergency expense to a high-rate card should be your last resort.
You might, however, look for a new credit card with a 0% introductory rate that will be in effect for a year or more, said Noah Damsky, founder of Marina Wealth Advisors. “This will provide you with the short-term cash you need, and provide you potentially with 18 months to pay it back, without interest.”
Just be sure to pay it all back before the 0% introductory period ends, otherwise a high rate will kick in for the remaining balance.
If your emergency is medical or dental in nature, ask the health provider if they offer a payment plan. “Many providers offer plans without interest, allowing you to spread the cost over several months,” said Marcel Miu, lead wealth planner at Simplify Wealth Planning.
For some people, another low-cost option might be to borrow from a close relative or friend, but only if doing so would not jeopardize your relationship — which is a very personal decision. “While this option requires careful consideration and clear communication about repayment terms, it can be a way to cover expenses without the formalities and costs associated with traditional loans,” Miu said.
A nontraditional way to access cash in a pinch
In recent years, alternative ways to access cash have also been created outside of the traditional financial system, which has proven expensive for many families.
Daisy Martini, a 29-year-old working for New York City’s Department of Education, felt she didn’t have many good options after she’d been temporarily laid off during the pandemic. Her bills were piling up and she had already accrued high credit card balances from her years in school.
So to get small, short-term loans to tide her over, she turned to SoLo Funds, a community financing platform that puts borrowers in the driver seat: They decide how much they need to borrow, when they can pay it back and how much they’re willing to pay a lender as a “tip” for providing the loan. That tip can never exceed 15% of the loan. Borrowers may offer a much smaller tip, or even nothing. It’s up to lenders to decide if they will accept the borrowers’ terms. Loan amounts can’t exceed $575 and the average is $248, according to SoLo cofounder Rodney Williams. Once borrowers repay in full, they can then borrow again.
Besides using SoLo for small emergency expenses, such as fixing a leak in the roof, Martini said she sometimes uses it for expenses she has a week ahead of when she knows she will be paid. She likes the platform better than the more anonymous interactions with a credit card company. Knowing who is lending to her gives her even more incentive to pay what she owes on time.
“I knew if I borrowed from someone in the community who cared, I would … pay them back. You’re paying someone back who empathizes with your story,” she said.
Simple ways to start building an emergency fund
While getting a low-cost loan to tide you over in a pinch may be a relief, not having to borrow at all is optimal.
To make the next emergency expense less stressful and costly, you can build emergency savings with small amounts consistently over time.
Damsky recommends setting up automatic daily transfers from your checking account to a savings account. For example, he said, if you want to save roughly $150 a month, you could set up a transfer of just $5 a day or $35 a week. At the end of a year, you will have built up more than $1,800, plus whatever interest you earn on those savings. To maximize that interest, try to transfer your money into a high-yielding online savings account, which currently pay between 4% and 5%, according to Bankrate.com.
The same pattern applies if your goal is to have at least three months of living expenses to protect you in case you lose your job. “Even small amounts, if consistent, can accumulate over time,” Miu said.
He also recommends redirecting at least a portion of one-time annual windfalls — such as a tax refund or bonus — to a high-yield savings account.
Two other proven ways to bolster emergency savings are increasing your income (e.g., taking on a side gig,) or cutting back on spending that you do not consider essential to your life, said Linda Grizely, a fee-only planner at Visions Financial Planning. But, she cautioned, ”It’s important to strike a balance and avoid excessive cuts. A plan that can be adhered to is the key to success.”
