If you lost your job, faced a health crisis that prevented you from working, or had to pony up a large, emergency expense, would you be able to cover your expenses? Even if you have a well-stocked emergency fund, you may need to find extra money or trim expenses.
And it’s always a good idea to contact your mortgage lender and credit card issuers to seek temporary payment relief. These suggestions will help you weather a financial crisis until you get back on your feet.
Call Your Creditors
If you’re facing a financial crisis, your mortgage lender, bank and credit card issuer may let you pause or lower your payments. Wells Fargo and Bank of America offer forbearance plans that allow customers facing a temporary financial hardship, such as a layoff, to suspend or reduce their mortgage payment.
American Express and Discover offer payment-assistance programs tailored to individual situations that could temporarily lower the interest rate, waive late-payment fees or lower the monthly payment on credit cards.
During the government shutdown, JPMorgan Chase contacted furloughed customers to offer help and automatically refunded overdraft and service fees on checking accounts. The company also launched a “special care” hotline for furloughed customers, where they could receive 90-day mortgage-payment relief and suspension of credit-card payments.
If you know you’ll be late or miss a payment on your student loans, contact the servicer. You may be able to stop or reduce federal student loan payments temporarily if you’re unemployed or experiencing an economic hardship.
Deferment allows you to stop monthly payments, usually for a year at a time, for a total of up to three years (the feds will pay the interest on some loans but not other loans).
Forbearance pauses payments in year-long increments. Interest accrues on all the loans, including subsidized Stafford loans.
Many private lenders offer short-term relief in the form of interest-only payments, and some offer forbearance.
Apply for Social Security
You’re eligible to file for Social Security as early as age 62. But if you do, your benefits will be permanently reduced by 25% compared with claiming at full retirement age—66 for most baby boomers. It’s usually best to wait until then so you’ll receive 100% of the benefits you’ve earned.
If you continue to postpone filing for benefits after you reach full retirement age, your payouts will grow by 8% a year until you reach age 70.
But delaying benefits may not be an option of you’re forced into early retirement because of layoffs or health problems. Claiming benefits early beats going into debt or losing your home.
If you’re married, consider having the lower-earning spouse file for benefits at age 62. That spouse will see a 25% reduction in benefits, but you can use the money to pay expenses while the higher-earning spouse’s benefits continue to grow.
To get an estimate of how much you’ll receive in benefits, go to www.ssa.gov/benefits/retirement/estimator.html.
Protect College Savings
As your child ages, ratchet down the risk in your 529 college-savings plan. If the stock market stumbles shortly before the tuition bills are due, it will leave you scrambling. By the time your child is in high school, most accounts should have a roughly even split between stocks and bonds or cash.
Or opt for an age-based portfolio, which automatically shifts the investments as the student approaches college.
Boost Financial Aid
Have a son or daughter in college? The Free Application for Federal Student Aid now uses older tax data, so your family’s financial situation may have changed since the information was reported.
If you’ve stopped working or had a financial calamity since the tax year used in the form (2016 for the 2018–19 academic year), contact the financial aid office at your child’s school to explain what has changed and ask about their appeals process.
Families having trouble covering expenses during the semester should contact the financial aid office, too. A growing group of colleges offer small emergency grants and loans, usually about $500 to $1,500, to help students fill the gap during an emergency, or to pay for books, groceries or other basics during the semester.
Tap These as a Last Resort
If you don’t have an emergency fund—or you’ve had to deplete it—you have a few other options.
Home-equity line of credit. Using a home-equity line of credit is a quick, hassle-free way to raise cash. But remember that your home is on the line if you default on the loan. The average rate for a $30,000 HELOC was recently 6.8%, according to Bankrate.com.
401(k) loan. You can generally borrow up to 50% of your 401(k) balance, up to $50,000, for any reason without taxes or penalty, and you have five years to repay the loan (or longer if you borrow to buy a primary residence). The good news is that you borrow your own money and pay the interest back into your account.
Most 401(k) plans charge the prime rate plus one percentage point. You’ll minimize the impact on your retirement savings if you continue to contribute to your 401(k) while repaying your loan, assuming your employer allows it.
The new tax law extended the time you have to pay back a 401(k) loan after you leave your job: You now have until the due date of your tax return for the year you leave your job to repay the loan and avoid taxes and a 10% early-withdrawal penalty if you left your job before age 55.
Roth contributions. You can withdraw contributions to your Roth IRA at any time without penalty or taxes—but by raiding your retirement savings, you do lose the ability for that money to grow tax-free for the future.
Cash value from life insurance. If you have a permanent life insurance policy, you can access a portion of your cash value through a withdrawal or policy loan.
You have to pay interest on a policy loan, but there is no repayment schedule. If you die with a loan outstanding, the amount is subtracted from the death benefit but is not taxable.
If the policy lapses while you’re alive, however, the loan becomes a withdrawal, and any money you received beyond the premiums you paid is taxable.
HSA withdrawals. If you have a health savings account in conjunction with a high-deductible health insurance policy, you can make tax-deductible contributions and withdraw the money tax-free for qualified medical expenses.
But if you have used other cash to cover your current medical expenses, you can save the money you contribute to the HSA and use it like a backup emergency fund, as long as you match withdrawals with eligible medical expenses you incurred since you opened the account, even if it was years ago.
Keep a stash of receipts for expenses you paid for eligible medical expenses in your records.