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What to Do in Case of a Rainy Day

A survey done by the Consumer Federation of America found that six out of every 10 people in America do not have money set aside for emergency expenses. Of the people that did have money saved for such an occasion, only one-third of those had less than $2,000 saved. That's much less than the amount of savings experts say we should have.


Think about it: what happens if you suddenly become unemployed, experience a sudden medical emergency, or just get into a fender-bender and have to repair your car? Would you have the liquid funds to pay for your mortgage or rent, utilities and other normal expenses and pay for an unexpected expense on top of it all or would you have to rely on your high-interest credit cards?


Relying on credit cards is not a safe bet, according to financial experts. The interest charged can be very high--in the double-digits. Plus, the more you run up your balances for big emergencies, the easier it can be to run them up for lesser emergencies to the point where you may run into trouble paying your bills.


Experts say you should have between three and six months worth of savings set aside for unexpected financial emergencies. It may be that you need to funnel a small amount of every paycheck into a separate account or it may be that you just need to cut your spending. Those are both wise approaches to increasing your savings. However, that may be difficult for people who earn less and just don't have the extra money to set aside.


Perhaps a better approach would be to get a home equity line of credit (HELOC) before any kind of crisis hits so that you're more prepared. That way, you won't have to scramble around if something happens.  If you are interested in exploring your options with HELOC, speak to an experienced mortgage banker.


A home equity line of credit (HELOC) is a second mortgage in addition to your first mortgage that works just like a credit card. During the draw period, you pay only if and when you make a withdrawal. This can be very convenient if there are multiple things you have to pay for at different times. Here's an example: should you happen to temporarily lose your job, a HELOC would allow you to make multiple withdrawals to pay for your rent, auto loan and other living expenses.


You could also refinance your current mortgage to an interest-only mortgage. You could still make the full principal and interest payment like you always do, but an interest-only mortgage also allows you to pay only the interest portion of the mortgage payment if you need to. By paying less toward your mortgage, you could have more money to funnel toward unexpected expenses. Then you can return to paying the full principal and interest after the emergency is over.

A big financial advantage of having a line of credit or interest-only loan is that, like any mortgage, the interest is tax-deductible, whereas the interest on your credit cards is not.

Whether you've scraped together your savings over time in a separate account, take a home equity line of credit, or refinance to an interest-only loan, you'll have peace of mind knowing that you're prepared for virtually any financial emergency no matter when it comes up. And that's the biggest advantage of all.

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