We all face small emergencies, and we can usually handle them with the money that’s in the bank. But, every now and then, an emergency situation can require more funds than we have saved. Are you financially ready for that?
Major life events may not have a warning system, but that doesn’t mean you can’t prepare. There are many options available that can address major life events before they occur. Let’s look at a few of the ways you can prepare for an emergency. Then, let’s dive into the biggest safety net that’s available to homeowners.
The easiest way to prepare yourself for the unexpected is to have insurance that will cover you and your possessions. Financial emergencies are often mitigated through insurance—even if you have to work hard with your insurer to make sure that your emergency situation is covered.
Health insurance is a must because even small illnesses can become catastrophic and it is now a requirement under the ACA. This type of insurance will help you cover many costs, especially if you’re able to stay within your insurer’s network. Unfortunately, some costs may not be covered, which may require you to negotiate with the hospital and your insurer to find an affordable repayment plan. Using assets, like the equity in your home, may help you pay a lower interest rate if you’re part of the 40% of Americans who currently owe money for healthcare.
Owning a wide range of assets can provide you with protection when emergencies arise quickly because you’ll be able to turn them into cash. Electronics, jewelry, cars and other items are easy to sell for cash when you’re in need.
You may also be sitting in an asset that you can use while reading this article—your home. Home equity is a great way to stay afloat during major life events and emergencies.
You’ve likely got a savings account that allows you to squirrel a little money away each month in order to plan ahead for the future. Long-term planning requires a mix of savings accounts, including one that is designed specifically for major emergencies.
Making room in your budget for savings is a great way to handle emergencies because you’ll have a little money upfront while you get the rest of your funding or finances together.
Consider speaking with your financial advisor about tax-advantage retirement funds and college savings plans that can help in special cases. Some of these plans may have penalties for early withdrawals, but they can save you when you’re in a pinch.
How We Really View Savings
Many of us view savings as money we shouldn’t use, but it’s actually designed to be used when we need it.
Savings accounts often start as we grow financially and realize we need a safety net for the future. Perhaps you’ve given up compulsive purchases in order to ensure that you’ve got money in the bank for a rainy day or a major life event.
When you get good at saving, it can be difficult to determine when it’s okay to use that savings to pay for major life events that crop up. Is it the right time for a new car? What about paying off a credit card or when it’s time to upgrade to a larger house?
There’s no uniform answer to when you should dig into savings, but there are some general guidelines that can help you. Prioritize your finances to help you avoid payment defaults. If it looks like a major life event will do long-term financial harm to you or your credit, it can be a good time to use savings.
You shouldn’t hang onto all of your savings if doing so would prevent you from paying off an expense that increases your overall debt. Knocking out debt early can actually lead to more money in your savings account as you free up future cash that would’ve gone toward interest payments, fees and other debt-related expenses.
Home Equity: Create an Asset You Can Rely On
The equity you have in your home can be a great tool to secure a low-interest loan when you’re in need. The good thing about home equity is that you get to keep it as it accumulates. It’s a silent asset that sits and grows as daily life continues and you pay off your mortgage, just waiting to be used when it’s needed.
Most homeowners rarely think of the need for an emergency fund that’s outside of the norm. We plan for a new roof, understand that we’ll likely need a new car and think about future upgrades when appliances need to be replaced, but we don’t often think about medical emergencies, job losses and other surprise life events.
As your home equity grows, it can become the emergency fund you need to cover a few months of living expenses. Benefits of turning to home equity for major life events include:
- Cash when you need it—home equity loans give you cash in hand,. That lump sum can pay off your surprise expense.
- Lower interest rates are likely, especially when compared to your average credit card and Personal Loan APR.
- While fees vary by lender, Discover Home Equity Loans does not charge application, origination, or appraisal fees, and no cash is required at closing.
- Borrow larger amounts than you would be able to with other lending options. Discover Home Equity Loans offers loans between $35,000 and $150,000.
Home equity can be a helpful way to support your lifestyle when things outside of your control interfere. One thing we always recommend is that you discuss your needs with a financial advisor. They can help you bundle home equity products with your savings and other assets in order to ensure that you are building the proper safety net .
Not Every Surprise Is Bad
When we look at major life events, our minds tend to go to dangerous and upsetting emergencies, such as a job loss, major medical bills or natural disasters, but don’t forget about all of the wonderful things that can come as a surprise in our lives! Your savings or emergency fund can also be tapped to make your dreams come true.
Home equity loans can play a role in paying for positive major life events, helping to bring your family closer together. Some of these great events include:
- Getting married and hosting a wedding
- Special events and celebrations, like the birth of a child or grandchild
- Buying a brand new car
- Paying for an education for you, a child or a grandchild
- And many more
Take advantage of the equity you’ve built over the years by using a home equity loan to pay for these major life events and expenses.
It’s always important to do your research, but home equity can be a better tool in an emergency—both good and bad—than high-interest credit card debt and other secured and unsecured loan options.