It’s quite possible (read: likely) that you will have a financial emergency well before you have your emergency reserves in place. So what should you do? How should you come up with money…when you don’t have any money? It’s actually a pretty simple solution: sell a lung. I hear they can fetch a handsome price on the open market. If you don’t feel like violating federal organ harvesting laws, then keep reading. I have a different plan for you.
It takes time to accumulate an emergency fund. A fully funded fund (yeah, you heard me) should consist of three months worth of your necessary expenses (obviously excludes things like dining out, massages, lawn care, house cleaning, etc). Most people that I encounter don’t make this fund a priority. This is a mistake. I have used my emergency fund no less than 10 times in the last 3 years. After every usage, I then turned my focus on replenishing this financial tool. So before we get to “how to navigate a problem with no money”, make sure that you understand that an emergency fund has saved me from flailing into financial ruin several times. It can do the same for you.
Let’s examine the two most common financial backup plans for those that don’t have an emergency fund: 1) credit cards and 2) parents/family. I find that those who fail financially, fail because they rely on one of these two types of backup plans. Those that thrive, or will thrive have COMPLETELY ELIMINATED these two backup plans as a possibility. I would NEVER consider putting money on a credit card, and I would NEVER ask my family for money. Unfortunately, these are the primary backup plans for most people under the age of 35. The only GOOD backup plan is: money. Real money.
Let’s now explore how to handle an emergency with a credit card. I refuse to discuss how to handle an emergency by borrowing money from family. I think it is a terrible idea. Me telling you how to borrow money from family would be the equivalent of telling a teenager how to make a Works Bomb. Once you know how to do it, you’ll do it.
One of the biggest challenges of using a credit cards as a backup plan is “accidentally” using the card for non-emergencies. Being able to identify a real financial emergency that warrants the use of a credit card is vital. Let’s examine a real life situation, and then show you how to handle the emergency using a credit card. This plan should ONLY BE USED if you haven’t yet accumulated your emergency fund yet. As soon as you accumulate your emergency fund, then don’t ever do what I’m about to prescribe. Deal? It’s like my college Tai Chi professor, Yi Lin, once told me. “In an emergency, you can drink your urine once.” I don’t know why he told me this, but he did. I will never forget him for this. He is my greatest mentor to date.
Scenario: You are “out of town” and you have major car trouble (brakes, tires, etc) that strands you. You don’t have $1,000 in your checking account to pay for the necessary repairs, you don’t have $1,000 in an emergency fund to transfer to checking, and you are terrible at running the shell game hustle.
How to: Handle this emergency by putting the repair cost on your credit card, and drive home. Do not pass GO, and you do not collect $200.
Now what?: As I mentioned before, you are “out of town”. You have a long drive home. Turn off your radio. Turn off your Gwar CD. Even turn off your Pete the Planner Show podcast. Think. Plan. The biggest mistake of using your card to pay for an emergency happens in this moment. You must put together a payment schedule to make up for this emergency. I’m not kidding. In the moment that you spend the money that you DON’T HAVE, you must start to calculate your “get out of debt plan”. Ask anyone who has funded a “not-that-big-of-a-deal” emergency with a credit card and is still in debt what their biggest mistake was, and they will tell you that it was their comfort with the debt. Think about how fast you want hand sanitizer when you shake someone’s hand who just sneezed in their hand and then forced a hand shake on you. THAT’S how fast you should want to get out of debt.
So you couldn’t afford the $1,000 repair. That means that you must reduce your discretionary spending for a set period in order to pay off your credit card. What does that look like? You have several choices here. Here is what they look like:
- Reduce dining out to zero for a couple of months.
- Suspend cable/satellite for a couple of months.
- Sell some stuff on eBay or craigslist. Or hold a garage sale.
- Reduce your grocery budget by making “budget food choices”
The reality is that you are now in debt because you spend too much money. If you didn’t spend too much money, then you would have an emergency fund. You must reduce your lifestyle in order to get out of debt. And better yet, you must reduce your lifestyle to accumulate your emergency fund.
How to choose a credit card?
People make WAAAAAAY too big a deal about “selecting the right credit card.” While you don’t want to get taken to the bank (odd use of a very true idiom), I think people waste way too much time and energy trying to pick the perfect credit card. My suggestion? Go to your bank, and get a credit card. Don’t listen to the benefits rundown. Don’t learn the point system. Don’t link it to your accounts. Don’t do anything but secure this TEMPORARY backup plan. You won’t need, want, or use the card the moment that your emergency fund is funded. DO NOT overthink the “what credit card should I get” scenario. Just get one at your bank, and move on.
The emergency is never the event itself. It only occurs in your potentially poor response.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.