In life, there are specific rules you should never break under any circumstance. For example, bringing uninvited guests to a wedding or not picking up your dog’s waste in the park. The same goes for putting fruit on pizza or crossing the streams if you ever dreamed of becoming a Ghostbuster.
There are rules to keep in the case of your personal finances. But, sometimes, rules have to be broken, especially during a financial crisis. So, with that in mind, here are six personal rules you can ignore when you need to.
1. Borrowing money from friends or family.
Whenever you’re in a precarious financial situation, the first place you most likely will turn to will be friends and family. But, as the saying goes, “Before borrowing money from a friend, decide which you need most.”
There are actually several reasons for that sentiment. For starters, it’s awkward. While admitting that you’re in a tough spot financially is the first step in rectifying the problem, you may not want to let others know how dire your situation is.
Additionally, this asking for a loan might be them on the spot. In other words, they may feel pressured to lend you money because they’re a relative or close friend. And, this could also put them in financial hardship.
As if this isn’t enough, there could be misunderstandings. For example, since there may be an informal agreement, you may be too relaxed when it comes to paying them back. And, in some cases, this individual may hold this over your head and have a “you-owe-me” attitude.
However, if you need money to cover necessary expenses like groceries or rent, this might be your fastest and most affordable option. Just make sure that you have a strong relationship with the lender and that you’re not putting a financial strain on them as well. And, to avoid any conflicts, have a loan contract in place.
2. Save 10% of your income.
The general rule of thumb was to save 10 percent of your income when it came to retirement savings. Not only is that less likely today, but it’s also not exactly a priority when dealing with a financial crisis.
“While it’s a fine start and certainly better than nothing, it certainly shouldn’t be used to benchmark success,” Michael Troxell, a senior wealth manager at USAA, told the Huffington Post. “That number won’t be enough for 90 percent of individuals, especially with longer life expectancy and rising healthcare costs.”
A significant problem, according to him, is that the 10 percent rule does not take into account expenses. “It is the expenses that end up hurting retirements, not the savings rates during one’s working years,” said Troxell.
Instead of using a specific percentage as a goal, Troxell suggests eliminating unnecessary expenses and saving whatever amount you can.
3. Don’t withdraw from your retirement accounts.
Even not being in your presence, I can see your jaw-dropping. To secure your financial future, you must never, ever touch your retirement savings. If you do, you’ll be forced to postpone retirement or pick up a part-time job during your golden years.
But, you may have no other options when facing significant financial hardship. Of course, this should only be after you’ve exhausted other options, such as depleting your emergency funds or borrowing from friends or family.
You should also consider other resources before withdrawing from your retirement accounts like your 401(k), IRA, or annuity. For instance, if you have trouble affording medication, see if there is an assistance program available to you. Or look into a home equity line of credit.
Be aware, however, that you must pay regular taxes on the money you receive if it is your last resort. In addition, you may also be subject to tax penalties if you’re under the age of 59 ½ — which is often the case with annuities. But, depending on the situation, like a disability that prevents you from working any longer, this penalty could be waived.
4. Always pay your bills.
When your income drops and you cannot lower your expenses, you may reach a point where you cannot pay your bills. Missed bill payments are typically accompanied by late fees and substantial credit score damage.
However, this isn’t the case all of the time. If you’re unable to pay your bills, it’s strongly advised that you postpone your payments. The practice of delaying payments became more commonplace during the pandemic.
“Currently, some mortgages, auto loans, credit cards, private student loans, or personal loans are deferring payments,” says Jen Hemphill, accredited financial counselor, author, and host of the “Her Dinero Matters” podcast. “There may be no penalty in terms of a late fee for not paying and not hurting your credit, but you need to have a good understanding of how the individual company is handling the interest portion and how that will impact you financially.”
Even following the pandemic, if you’re struggling to make ends meet, Hemphill recommends calling each company you use and negotiating a payment plan with them.
5. Avoid plastic, aka credit cards.
It’s strongly suggested that you have enough money set aside to cover at least three to six months’ worth of living expenses. If you lose your income and your bills begin to pile up, having an emergency fund will keep you afloat. In reality, fewer than 4 in 10 Americans can handle an unexpected expense.
Despite this, experts warn that you shouldn’t use your credit cards to cover financial emergencies. But, “The whole point of having access to credit is that you can tap it when you need it, and practicing good credit habits in good times means you’ll have flexibility when disaster strikes,” Gregory Karp and Kimberly Palmer write for NerdWallet. “Credit cards aren’t a substitute for income, but in an emergency, you can use them to survive disruption in your income. That means giving yourself permission to break a few of the ‘rules’ until the crisis passes.”
Here are seven credit “rules” you can break in an emergency.
- Never carry a balance month to month. The cost of credit card debt may be high. But it may be worth it if the alternative is to go without necessities, or if you need to save money for items that aren’t available on credit.
- Pay more than the minimum amount due. “Paying only the minimum keeps your account in good standing when access to credit is critical,” adds Karp and Palmer. “It won’t do much to reduce your debt, but it can help you stay afloat.”
- Keep your credit utilization under 30%. Then, using a lot of your credit won’t damage your credit score permanently.
- Redeem rewards for maximum value. Even if you must convert rewards to cash to pay for basic expenses, it makes no sense to sit on hundreds of dollars worth of rewards when you must make ends meet.
- Credit cards aren’t an emergency fund. It’s not always easy to stash money in a contingency fund, and when disaster strikes, it’s often too late to get started. In this case, credit may be your only option.
- Don’t just park debt at 0% — pay it off. With a 0% introductory APR period, you can transfer a high-interest balance to a credit card that gives you time to pay off the balance. Of course, you must eventually pay off the debt, but it can wait until you’re back on your feet.
- Don’t hurt your credit score. If you’ve been able to build good credit can use it when needed.
6. Get a second job.
If you’re strapped for cash, it may be tempting to pick up a second job. But, will the additional income justify the extra time and associated expenses?
For example, if you’re a parent, you may need to factor in childcare costs. So, let’s say that you’re bringing an extra $600 a month, but babysitting takes up half of that. Is it really worth the time and expense?
Unless you’re able to work from home, you also take into account transportation like gas or fare for public transportation. As if that weren’t enough, a second job could interfere with your day job and cause you to miss new opportunities. And, the extra income could place you into a higher tax bracket.
That’s not to say you should completely write this off. But, for some people, picking up a second job isn’t always viable.