How to handle a big, unplanned expense

Posted by Cindy Wilson on Aug 12, 2016 2:11:00 PM
Imagine the scenario: It’s 90 degrees outside and your central air conditioning system decides to take its last breath and sputter to a halt. You knew it was on its last leg; you’d just hoped it wouldn’t give up on you during a heat wave. But it has, and the repairman informs you it’s beyond repair; a replacement system will cost you $5,000. So now what?
According to a recent article in the Atlantic, (“The Secret Shame of Middle-Class Americans,” May 2016) 47% of Americans wouldn’t be able to come up with $400 (let alone $5,000!) in an emergency, except by credit card, borrowing or selling something.
If you are low on savings and a large, unplanned expense arises, here are the key questions you should be asking:
  • Is it really an emergency? Assess the situation in a cool-headed manner. If your air conditioner goes on the fritz, is there a short-term fix available such as a window-based AC unit or inexpensive box fans? If your car is giving you trouble, can you ride with a friend or use public transportation in the short term?
  • How liquid are your assets? Take a look at your portfolio, and where you can withdraw money in the least harmful way. Money in a bank account would be your most liquid asset, since it is the easiest to withdraw. If most of your money is tied up in IRAs and a 403(b), however, it may be tempting to take a distribution (especially if your credit rating isn’t good). Remember that early withdrawals from qualified retirement plans come with a 10% penalty on top of the federal income tax you’ll owe. On a positive note, if you’ve owned a Roth (after tax) IRA, you may be able to withdraw contributions, at any age and penalty free. Don’t rule out any option just yet. Each person’s situation is unique. If a Roth distribution ends up being your best option, consider whether you can withdraw just enough for a down payment and finance the rest. Sometimes, blending two strategies can make sense, and can lessen the impact on any one account.
  • What are your financing options? Some workplace retirement plans allow you to take a loan against them, which is preferable to simply plundering your retirement account, robbing your future self of money. The air-conditioning company itself may offer financing options in the form of an unsecured loan from a third-party lender. Though quick and easy, the interest rate may be high, so be sure to read the small print and try to negotiate the rate, if possible. A credit card is another obvious way to get money fast, but if you choose to take that route, be sure to shop around for the lowest interest rate and then pay off your balance as soon as humanly possible. Another option is taking out a loan or line of credit against the equity on your home; the interest will most likely be lower and is often tax-deductible. The downside is that these loans can take much longer to close. I wouldn’t advise anyone to get into the habit of tapping into home equity, but if you must, maintain at least 20% in equity, as a general rule of thumb.
  • Are you eligible for any government subsidies? Some cities offer home improvement loans with similarly favorable interest rates to low-income families (the federal office of Housing and Urban Development has a similar program for all income levels1). And if you install a high-efficiency system, you may be entitled to a tax rebate from the federal or state government.
  • How low can they go? I always advise friends, family and clients that they can negotiate anything. With a big-ticket purchase, it’s an especially good idea to attempt to bring down the sale price. When haggling, hold your cards close to your chest; do not reveal the severity of your situation. If a vendor knows how desperate you are, it could be harder to nudge him on the price. You may be the kind of person who doesn’t feel comfortable haggling in a store, but now is a good time to start. Compared to the discomfort of an over-heated home, it’s really no sweat.
     
When a big, unexpected expense comes along, it doesn’t have to wreck your budget. Whether it’s an over-heated home or an over-the-hill automobile in need of sudden replacement, the best way to handle an emergency is to stay cool and carefully review your options.
1 “Property Improvement Loan Insurance (Title 1),” U.S. Department of Housing and Urban Development website. HUD.gov , accessed August 2016.
Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts. Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.
Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice. Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expertʼs opinion or other information you obtain from the Woman2Woman:Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.
This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800 842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.
The TIAA group of companies does not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.
The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investorʼs personal advisor based on the investorʼs own objectives and circumstances.
Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.
TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.
C14636