A cash crisis is inevitable for most people; it pays to be prepared

The average American family now carries a credit card debt of nearly $10,000 from the twenty or so debit and credit cards they own. It’s not unusual for people to actually owe more in unsecured credit card loans than they earn in a year! That’s not a good thing and it’s indicative of an even worse problem - as a nation, we’re unprepared for a financial crisis.

You never know when a financial crisis will hit. You may lose your job or be involved in an accident that leaves you unable to work for a long period of time. What will you do in that event? How can you prepare?

We’ll examine a few options and offer some suggestions for how you might prepare for that day you hope never comes.

• First step - take a deep breath and don’t panic. The worst thing you can do is take action immediately.  People often make rash decisions in a moment of panic that can come back to haunt them later. A good example of this is taking out a loan against your 401(K) account on an impulse. Borrowing against your retirement fund has long-term implications and it could jeopardize your retirement. Worse, if you find yourself out of a job before you repay the loan, you may find it all due immediately, making a bad situation worse. 

• Examine your situation. Look over your assets and your debts. Make a budget. Decide which nonessential things you can do without for a while. Can you eliminate cable TV for a few months? Which bills need to be paid now and which ones can wait until later? What do you have in the way of liquid assets? Do you have cash savings? Get a complete picture of all of your finances before you do anything. It pays to work from an informed position, rather than just going on impulse.
• Consider a home equity loan before borrowing against a credit card. Thanks to ever-rising real estate prices, Americans have more equity in their homes than ever before. If you’re employed, you can probably arrange a home equity loan or line of credit, which will allow you to borrow against the value of your home. A benefit of this is that the interest is tax deductible. A credit card loan, on the other hand, does not have deductible interest, carries higher interest rates and always comes with the potential of nasty late fees.

These are just a few things you can do to prepare for a financial emergency. The list is by no means complete, and we will cover some other options in a later article. The bottom line is this: A financial emergency is probably inevitable. Everyone runs into a cash crunch sooner or later. The last thing you want is to be unprepared when one arrives. Plan ahead.

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