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3/20/2008

Studies show that most American families are not financially equipped to deal with short-term financial emergencies that may arise at any time. Whether we're talking about a car repair, layoff, or unexpected bill, a cash shortfall might send you into a long-term tailspin if you don't proceed with caution and planning.

1. Identify the problem.
   Before you panic, it's a good first step to identify exactly how big the problem is and compare it to your budget -- both this month and next. Maybe the problem isn't as bad as you first thought if you can make payments against the total amount or find a way to tighten your budget and "create" some cash. Until you know how much money you're short, and for how long the situation will exist, you can't nail down a strategy for dealing with the issue.
2. "Fast Cash" is no solution to a long-term problem.
   Payday loans, advances from credit cards, and short-term loans aren't necessarily a good answer to a shortfall, especially one that may last for a couple of months. It's one thing if your cash emergency is relatively small (say, between $200-$500) and expected to have a short life. Payday loan offices specialize in exactly that kind of loan, and if you're sure you'll have the money in your account to cover the check you'll write to finance the money through such an outlet, it's a viable (albeit expensive) way around the crunch. It's important to understand, however, that these loans are exceptionally expensive and unforgiving in most cases, and they should never be a habit nor the first resort in trying to make ends meet. Also, you need to account for the dent in your budget when the loan comes due -- many consumers fall into a trap of extending payday loans, compounding the total amount they owe, even using one payday loan service to pay off another. That's a vicious cycle that only grows your amount of debt. The same can be said of credit card debt unless you can pay off the loan quickly; credit cards tend to charge premium interest rates based on your credit record, so unless you're able to repay the debt quickly, you'll be paying interest on that amount. In general, it costs money to borrow money, so you want to limit those numbers and the time it takes you to repay a loan.
3. Explore the alternatives.
   No one likes borrowing money from friends, relatives, or employers. In fact, many employers have a flat policy of not allowing loans, and those who may allow such an arrangement only do so under specific circumstances and plans. It might mean borrowing cash against your vacation time, being advanced money that you've already earned, and your employer may only be able to forward a percentage of that amount. Most employers feel that it's not wise for them to act as a bank or loan service for their employees, and there is some sense to that. Many employers, on the flip side, know that it's better to risk money under carefully-designed limits than to get calls from creditors or outside loan services hunting down employees who are late with their bills. The bottom line here is that it doesn't hurt to ask, or to explore overtime or other ways you might bring in a little fast cash that, as earned money, you wouldn't have to pay back.