Where to Turn for Help When You Don't Have an Emergency Fund


When it rains, it pours.

The water heater broke. The car is on the fritz. The expensive (and new!) smartphone fell in the toilet. And to top it all off, you don't have an emergency fund. Where else can you turn for cash? 37% of Americans ask themselves this question because they don't have enough savings to pay for even a $500 or $1,000 emergency expense.

Let's review a few ways to cover a sudden cash crunch — and how can you make sure it doesn't happen again.

4 Ways to Cover Emergency Expenses

Keep calm and tap into these four resources to take care of unexpected bills.

1. Cash Advance From a Credit Card

While having a credit card can cover the bill at most merchants and retailers, many small businesses still only take cash or personal check. In 2012, an estimated 55% of U.S. small businesses denied payment on plastic to their customers. However, it isn't just retailers. For example, my kids' pediatrician and the guy who does my taxes only accept personal checks.

In those instances that you need quick cash to cover a small payment, check if your credit card allows you to take a cash withdrawal at an ATM. To obtain your card's PIN, you may need to call customer service or visit your card provider's online portal.

Keep costly cash advances at a minimum, and pay it off fast. In 2015, the average APR of a cash advance was 8.54% higher than the average APR of a regular purchase. Even worse, some cards may have additional surcharges for the transaction. Use a cash advance if you're in a bind at the moment, but will be able to cover it within a short period of time. Interest starts accruing immediately on cash advances. If you need a bigger sum or longer to pay if off, try some of the other suggestions below.

2. Reduce Withholdings

You can adjust your form W-4 virtually as many times as you wish. To increase the amount that you keep from your paycheck, contact your HR department on how to update your W-4. The easiest way to reduce your federal tax withholding for the next pay period is to increase the number of allowances (line 5) that you claim. Under most circumstances, adding two to three allowances can dramatically decrease your withholding.

Once you've covered your emergency expense, update your W-4 again to return withholdings to their original level. Use the IRS Withholding Calculator to find out the necessary steps to make up for the reduced withholding period and minimize your tax bill.

3. Borrow From a 401K

There are very few times in which you should take out a loan from your 401K. When you don't have access to cheaper forms of credit but do have a solid relationship with your employer, you might consider joining the 13,000 holders of 401K plans that take a loan each month. (See also: This Is When You Should Borrow From Your Retirement Account)

If your plan administrator allows you to take out a loan, make sure to stick to the payment plan and pay back the loan in full within five years. Otherwise, you run the risk of turning the unpaid balance into a distribution, subject to applicable federal and state income taxes and potential extra fees from the IRS, state government, and plan administrator. While most plans don't have a penalty for early repayment of a loan, they all require you to pay it back within 60 days of termination of employment.

4. Early Withdrawal From an IRA

Those that have an IRA instead of a 401K might be able to take an early distribution without the extra 10% tax from the IRS. While you'll still be liable for applicable income taxes, qualifying medical events can be paid for without penalty.

Here are two examples. First, most IRA holders can take a penalty-free early withdrawal from their IRA to cover out-of-pocket medical expenses greater than 10% of their adjusted gross income. Second, if you are unemployed for at least 12 continuous weeks, you can take a penalty-free withdrawal from your IRA to pay health insurance premiums during unemployment. (See also: 7 Penalty-Free Ways to Withdraw Money From Your Retirement Account)

6 Ways to Build an Emergency Fund

Building up an emergency fund is an essential part of your emergency plan. Given that there are additional ways to cover rainy days, set up yourself for success.

1. Automate Contributions to Emergency Fund

Pay yourself first by automatically routing a predetermined contribution from each paycheck to your emergency fund account. This way you minimize the chances of using what should go into your emergency fund on living expenses or discretionary purchases.

2. Balance Between Liquidity and Interest Rates

While an investment account or certificate of deposit may provide a higher interest rate, such types of accounts have a longer wait time to access your funds. Start off with a high-yield savings account until you build at least $1,000, and then start contributing to a less-liquid but higher-paying account.

3. Find Out the Withdrawal Rules of Your Retirement Accounts

During an emergency, you'll probably have very little time, but lots of stress. Be proactive and discuss in advance with your plan administrator the process to take out a loan from your 401K or early withdrawal from an IRA. For future reference, keep a summary of the process and a copy of any necessary forms.

4. Contribute to Retirement Accounts

Of course, your retirement accounts need to be funded in the first place before you can take a distribution. Boost up your contributions from each paycheck and take advantage of employer matches. The benefit is triple: You'll build up your nest egg, reduce your taxable income, and prepare for a rainy day.

5. Reduce Expenses

The money for all these contributions to your retirement account and emergency fund has to come from your paycheck. For a month, track all of your expenses in a spreadsheet and decide which ones can you nix. Take a daily $6 coffee fix for example. That's $180 in 30 days, about $1,092 in six months, or $2,190 in a year!

6. Make the Best Out of a Windfall

Whether it's a tax refund, monetary birthday gift from grandma, or bonus check, sock away that lucky windfall into your emergency fund. (See also: 6 Smart Things to Do With Your Bonus)

What are other ways to turn for help when you don't have an emergency fund?

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Guest's picture

Other ways that might be better in the long term are to:
- have a garage sale
- pick up extra work even if it's babysitting, dog walking, lawn mowing, etc.
- eat from your pantry for a week or two. Most of us have enough that we could forego grocery shopping for a while
- stop going out to eat
- stop buying clothes. Most of us have plenty for YEARS.
- cash in any savings bonds you might have lying around
- once the emergency is over, continue these strategies until you have a real emergency fund

Damian Davila's picture

Hi Julie,

I agree with you in that your suggestions are great to build up an emergency fund. However, the first part of this article was referring to last-resort methods to get cash for an emergency expense that you would have to cover within 48 hours or so. Otherwise, they would be called "emergencies".

Best regards,