Without an emergency fund, when Joseph encounters an unexpected expense like a flat tire or a doctors visit, he will have to use other sources to fund that need. Alternatives to the emergency fund might include:
- Credit Cards: Many people use credit cards to fund the cost of unexpected expenses and make a plan to pay them off over time, but before they can get one emergency paid off, another happens. The interest and the fees associated with the credit cards compound the cost of that unexpected expense.
- Payday Advances: Some employers have been known to offer their employees a payday advance. That can help meet that immediate need, but when payday comes, there will still be the regular bills to pay and now not enough payday to pay those regular bills so the cycle continues.
- Payday Lenders: For a small fee (about $15 - $20 per $100 borrowed) you can get a quick loan at the corner payday lender. This like the payday advance will keep you in the cycle of debt as the loan comes due at the next payday cycle and that leaves little for you to meet your current needs. Additionally, that annual percentage interest rate can be as much as 400% for that short loan you took out. Where the lenders really make their money is when you renew your loan and pay another fee to extend your loan for a litte longer. Both payday advances and payday loans do not report your payment to the credit bureau (except in circumstances of delinquency) so they don't help you build your credit.
- Family/Friend Borrowing: With family and friends, while they may be willing to help you in a pinch, you will find that they are not as accomodating when you are not able to repay on time. This can damage relationships and make Thanksgiving very tense.
- Charity: There are charities to assist in a crisis, but the funds available from charity are minimal and they need to stretch their dollars over all the emergencies that come to their doors each month. They may want to help you but not have the funds to give.