Having a safety net is vital to deal with unforeseen expenses. Financial experts suggest three months’ worth of your living cost as an emergency corpus.
Unexpected expenses can be a bolt out of the blue when you are not so well off or simply getting by. Despite a fall in the unemployment rate, about 40% of Americans struggle to pay off their unforeseen expenses. It is all but impossible to prognosticate when you need extra money, but it is always wise to assume that something will show up and brace yourself.
An emergency cushion comes in handy during a rainy day. You should try to set aside part of your wedge every month. Even though you are living paycheck to paycheck, stashing away should not be difficult after cutting down on your monthly outgoings. Calculate how much you will be able to put by and then stick to your plan.
There are several ways you can keep going, even in emergency situations. Here are the three key steps to protect your budget from blowing up when you, out of the blue, come across a need for a lot of money.
- Use an effectual budgeting technique
Believe it or not, budgeting is the key. Not until you have a budget will you be able to comprehend where your money is going. It is likely that you are falling short of your savings by dint of extra spending. Carefully look over your monthly expenses and then see where you can whittle down. The more you slacken off your spending, the more money you will retain in your pocket. Make sure that you use this money to contribute to your emergency cushion.
However, you cannot make that happen without using the right budgeting technique. Bear in mind you should not be influenced by what others are doing to stay afloat, as their financial situation varies from yours. You should try out all budgeting methods to understand which one works best for you, such as the envelope method, bare-bone, pay-yourself budget, and 50/30/20 budget, to name a few.
It might take some time to understand which budgeting is best for you so you do not give up on it. Further, when you see any change in your financial condition, you will have to fine-tune your budget.
- Increase your income sources
If you are earning low wages or pay, figure out the ways to improve your cash flow. Do not dip into your IRA or 401(K) account, as you might end up with a penalty for early withdrawal. Talk to your employer to see if they can increase your pay. Before heading, you should have a list of your accomplishments in your company. If your employer is indisposed to increase your pay, you should try to switch to another job with a higher pay.
You can also consider a part-time job or freelance or contract-based job. Most of the freelance projects can be handled at the weekend in exchange for a good stipend. If you owe personal installment loans online, you can use income from your side gig to pay off the debt.
In addition to income, there are many ways to increase your cash inflow. Look around your house and see if you have anything you do not need and you can sell. Selling old items online through eBay can help you earn some money. It might not be a lot, but a little help is sometimes sufficient to be able to clear your debts. The sooner you clear your debts, the more money you will retain. After the settlement of the debt, you can transfer the amount equivalent to an instalment every month to your emergency cushion.
- Keep your credit score in good condition
Even though you have a safety net to fall back on when emergency expenses crop up, you cannot expect that your savings will be enough to cover your expenses. You may still need to borrow money. You should try to keep your credit score in good condition as it will help you avail of lower interest rates.
To maintain your stellar credit report, you will have to pay off all bills and debts on time. If your credit rating is poor, figure out its cause and then fix it. Factors responsible for a low credit score other than missed payments are a high credit utilization ratio, a high debt-to-income ratio, and the age of debts.
It is always recommended that you keep checking your credit file. Make sure that your credit report does not consist of any unidentified debts or accounts that do not belong to you. It is likely a case of identity theft. If so, complain to credit reference agencies.
Pay off all your debts because a high debt-to-income ratio will take a toll on your credit score even though you have been making payments on time. A general rule of thumb says that it should not be more than 30%. Likewise, you should keep your credit utilization ratio low. Make sure it is not more than 25%.
If you have any unused credit card account, do not close it because closing unused accounts will increase your credit utilization ratio. Further, you will fail to achieve the benefit of having older accounts. Closing of your old accounts will impact the age of your credits. As a result, you will lose your credit points. When your credit report is up to snuff, you can easily qualify for a $3,000 loan at low interest.
How to pay for unexpected expenses
You can dip into your emergency corpus to meet your unforeseen expenses. However, if you do not have sufficient funds, you can simply borrow money, provided your credit score is good. Otherwise, it will cost you an arm and a leg. If it does not seem to be a good alternative, you should use a credit card, as you can avoid paying interest as long as you pay your balance on the due date.
You can ask your employer for an advance. Borrow money from your friends and family. However, promise them that you will pay it back. Otherwise, you will end up with a strain on your relationship.
The final word
Unexpected expenses can pop up at any time, so you must have a safety net to fall back on. You will need to consistently stash away some money every month so it keeps growing. However, if you still need more money, you can borrow from a direct lender.
In order to take advantage of low-interest rates, you should improve your credit score. Keep your credit utilization ratio and debt-to-income ratio as little as possible.
