What to Do When Your Emergency Fund Runs Out

Emergency Savings May Only Go So Far in a Crisis

Hispanic couple having difficulty paying bills online
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Emergency funds are designed to be a financial lifeline when the unexpected happens. But what happens when the unexpected doesn’t let up?

Nearly 14% of Americans say they wiped out their emergency savings as a result of the coronavirus pandemic, according to a recent survey conducted by CNBC and the fintech investing platform Acorns. If your emergency savings is running low because of an extended drop in income, pandemic-related or otherwise, you may be wondering what to do next.

Evaluate What You Have

The first step in managing a cash crunch is knowing what resources you have to work with and what expenses are reducing those. Even if it’s unpleasant, review your entire financial picture, including:

  • How much you have remaining in emergency savings
  • What income you have, if any
  • Your current budget and expenses
  • Available credit you can draw on
  • Assets you can sell, borrow against, or rent out

When you're in a financial emergency, having options is essential. A clear view of your financial picture allows you to identify options that can help you adapt and survive in your new circumstances.

Steer clear of high interest borrowing options, such as payday loans or no-credit-check installment loans, as these can charge effective APRs in the triple-digit range.

Streamline Your Spending

Most likely, you’re already cutting costs by shopping smarter for groceries, stopping automatic contributions to retirement and savings accounts, and eliminating or reducing paid monthly services (cable, satellite radio, gym membership). Some additional cost-cutting measures include:

If you're considering using a bill negotiation service, check the fees to make sure any potential savings you get are justified by the cost.

Reach Out to Creditors

Options are available through your lenders and creditors to help manage your debt. Some possibilities worth exploring include:

Coronavirus-Related Relief

Some measures are applied automatically. For example, the CARES Act temporarily suspends payments on federal student loans through the end of 2020, and interest rates have been reduced to 0% for eligible borrowers.

The Act also includes provisions for homeowners who need to stop making mortgage payments. If you have an eligible mortgage loan, you can request a forbearance for up to 180 days during which no payment will be due. And foreclosure actions on federally-backed loans are delayed through at least December 31, 2020.

If you rent, the CDC has banned rental evictions through December 31, 2020 for eligible individuals. To use this protection, you and each adult listed on the lease need to complete a form attesting to the details of your financial situation and submit it to your landlord.

Hardship and Deferment Options

When reaching out to creditors, be candid about your financial situation, says Adem Selita, CEO and co-founder of The Debt Relief Company. "The better you explain your hardship, the better your odds of receiving more relief on your obligations."

If a creditor offers a hardship option, make sure you understand the terms and get it in writing. Deferring mortgage payments, for example, can offer short-term relief but could mean trouble later if the terms require a large balloon payment to cover the deferred payments.

Before enrolling in a hardship program, ask how it will be reported to the credit bureaus. Ideally, the lender or creditor will report your account as current as long as you adhere to the program guidelines.

Consider Tapping Your Assets 

Extreme circumstances sometimes call for extreme measures. Look at your list of resources. Can you monetize any of them?

Your Home

For instance, if you own a home and have extra space, you may be able to rent it out for storage or tenancy. While renting space may be a viable option for some, if it poses a safety threat to you or your family (for instance, exposure to COVID-19), consider other options.

Review zoning ordinances in your city to make sure any rental arrangement you’re considering (especially if it's short-term) is legal.

Selling your home to access tied-up equity is another possibility, particularly if you have an oversized mortgage payment or are no longer able to make mortgage payments.

Remember, your home is an investment, the price of which is subject to appreciation and depreciation based on the overall real estate market. If real estate values have appreciated significantly in your area, realizing those gains by selling your investment could be prudent.

Retirement Accounts

If you have a 401(k) or IRA, tapping those assets may be an option, but only as a last resort and perhaps not even then. Through December 30, 2020, the CARES Act makes it possible to withdraw up to $100,000 from a 401(k) or IRA without triggering the 10% early withdrawal penalty.

But depleting your retirement accounts can have significant negative consequences for your long-term financial health. When you withdraw retirement funds early, you miss out on compound interest. Even if you put the money back later, you may not have sufficient time to make up for the lost growth.

If your situation is particularly dire, consider that retirement accounts are generally protected during bankruptcy proceedings.

Look for Financial Assistance

Depending on your situation you may qualify for help with energy bills, phone bills, cash assistance, housing assistance. Programs worth exploring include:

Kari Lorz, personal finance expert and founder of Money for the Mamas, recommends checking with your employer and your employee benefits package to see if assistance is available, such as hardship grants and service plan discounts.

Most importantly, don't panic if your savings are running low. "If you have an emergency, and no emergency fund, the first thing to do is to breathe,” Lorz says. “You will find a way, it just may take some digging."

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