You might find yourself in a situation where you have to borrow money—and although it’s an option you’d rather avoid with a ten-and-a-half foot pole, it’s simply your reality right now. Odds are that one out of every two people reading this have seen their income drop or lost it entirely in the past couple months. The speed of this downturn is shocking, and it might be hard to orient yourself financially with so many unknowns.
At YNAB, we’ve been working to cut down some of that fear and put the power back in your hands. We’ve shown you how to make a hunker-down budget. We’ve talked about ways to cut spending, make your money go further, and increase your income.
But maybe for you, it’s just not possible to completely close the gap between what’s going out and what’s coming in, at least in the short term. You’ve plumbed the depths of your spending, you’ve wrung out every idea to bring in more money, but you’ve still fallen short. No matter what you do, right now you simply don’t have enough money to cover your expenses. So, what then?
I think it’s time for us to talk about the dreaded D-word. That’s right, let’s pull open the closet and talk about debt, because some among us are going to have to use a credit card right now. And if you hear nothing else, I want you to hear this: that’s okay.
Debt is a Reality
Now, while we’re being honest, I want to admit that we on the YNAB team are sometimes guilty of not talking about this reality. Like you, we hate debt with a fiery passion! We want the whole world to get out of debt, and we never want to advise anyone to go into debt.
But it also feels more compassionate and honest to acknowledge that some of us will have to use credit to cover some of our expenses right now. So rather than ignore it, we wanted to face that reality with you.
Make Debt Your Last Resort
But I do want you to make debt the very, very last resort. Here’s why:
Debt Kills Creativity
I think a real-life story will drive this point home. The founder and CEO of YNAB, Jesse Mecham (great guy!) learned this first hand. Way back in his pre-YNAB days, he was a 22-year-old, newly-married college student, and he had decided that debt was not an option. He wanted to get through college debt free.
The only problem was, he and his wife Julie didn’t have enough money to do that. They had a basic, bare-bones budget and saw each month they came up $350 short of being able to cover the school payment. Now, a student loan of $7,000 would have easily closed that gap for the rest of his time in school. But for Jesse and Julie, debt was not an option. So instead, Jesse looked around for some ways he could make more money. He decided to use his skills as a budding accountant to sell an Excel spreadsheet he and Julie had made for their personal budget. If he could make $350 a month selling a budget spreadsheet, it would be enough to cover the bills without debt. That’s how Jesse learned a very important lesson. Which brings us to the next point:
Constraints Unleash Creativity
I’m sure you’ve figured out by now that’s the story of how You Need a Budget began. If 22-year-old Jesse had taken a small student loan instead, the YNAB software would not exist! His commitment to close the gap without debt forced his brain to come up with another solution.
Act as if Debt is Not an Option
If we act like we can always fall back on debt, we won’t even be capable of imagining all the ways we could have soared instead. This crummy situation can actually be an opportunity! But it will be nothing but a crummy situation if we let debt erase all our other options.
Deal with Guilt
But let’s switch gears here, because the very last thing we want is for you to wallow in guilt if you’ve had to borrow money to fill in the gaps right now. Guilt can be a good thing, for a moment. It can motivate us to take action!
The fact that you’re reading this right now tells me that you care about your finances. You may be ready to do everything you reasonably can to get through this painful time without adding debt. By all means, fight to stay out of debt! But in spite of our best, most ardent efforts, some of us will come out of this fight with a few financial scars. Don’t let guilt about that add emotional scars, too. That’s not going to you any good. Let’s take that guilt and put it away.
Do These Things Before You Borrow Money
Before taking on new debt, run through this checklist. Have you done all these things first?
- File for unemployment/underemployment benefits if available
- Started a budget
- Cut spending
- Looked for ways to increase income
- Depleted your emergency fund and savings
If You Have to Borrow Money
If you’ve done all the above and have to borrow money, here’s a list of borrowing options with a pro and con of each. Some of these options are certainly better than others, but we’ve listed them here to help you think through it.
Start Riding the Credit Card Float
Ouch! It hurts us to say that, because our goal is to get people a month ahead, not a month behind! But it is an option. Riding the credit card float means that your monthly spending will be paid off with next month’s dollars.
- Pro: It’s immediate. If you have a credit card, you can implement this right now.
- Con: It will put you perpetually behind a month, which can be a hard habit to break!
Use a 0% Credit Card
Many credit card companies offer 0% APR for a number of months as a promotion. If you ask your current credit card company, they may be able to offer you 0% APR if you ask.
- Pro: This will give you access to credit without extra interest payments (provided you’re able to pay it back before the promotional period is over).
- Con: You need to read the fine print very carefully. Some of these offers may come with fees. Others may force you to pay a large balloon payment of accumulated interest after the pay period is over. Tread carefully!
Ask Family for Financial Help
This option is obviously super delicate, and it’s not possible or wise for everyone. If a family member does end up loaning you money, create a written-down contract with the terms written out that both parties sign. 100% not joking. It’s very easy for one side or the other to forget the terms if they’re not written out. Family relationships have been ruined over this.
- Pro: If you have a healthy relationship with your family member and you communicate very clearly, this can be a positive experience. If their goal is to help you through a hard time, that can help bind you closer together.
- Con: If you have an unhealthy relationship or you don’t communicate clearly, this could do some serious harm. Borrowing money from family will change your relationship, even in the best circumstances, so be careful!
Tap Existing 401k or IRA Funds
If you’re in the US, recent legislation allows many folks to do this without the usual penalty—read more if you qualify here.
- Pro: If you qualify to avoid penalties right now, this can be a way to avoid debt entirely.
- Con: You’re unplugging that money from what may otherwise be a good investment and it may delay your retirement goals.
Apply for a Personal Loan
- Pro: You normally won’t have to put up collateral for this type of loan and interest rates are typically lower than credit cards.
- Con: They can be hard to get. You’ll need good credit, and it may be hard to qualify if you’ve recently lost income (there’s a catch-22 for you).
Get Money from a Cash-Out Refinance, Home Equity Loan, or a HELOC
- Pro: You’re tapping an existing asset, and interest rates may be lower than other options.
- Con: You’re often putting your home up as collateral! This carries some real risk: be sure to read the fine print and fully understand your terms for this one.
Actually, just don’t. Avoid whenever possible!
- Pro: We had to try hard to think of a pro, and we came up with one: payday loans makes it easy to get money quickly.
- Con: You sort of get robbed in the process: interest rates can be 300-500% APR. 😱
- Another con: The payday loan industry often uses predatory practices. Yikes!
Plan to Pay it Back
While things may seem very dark right now, I truly believe that you will come into the light again. Nothing about your financial situation is static. Your income will improve one day. You will come out of this difficult time. And when you do, the best thing to nurture your finances back to full strength is to make a plan to pay back any debt you’ve acquired as quickly as possible.
And that plan is really very simple. Follow the four rules, make a plan for your expenses and let a budget guide your way. In the weeks or months or years ahead when you come out of this financial downturn—whether you get your old job back or find a new (maybe better!) job—keep doing the things you were doing when times were hard.
There will come a time when regular income will return. When it does, celebrate. Then, work away this debt and leave this whole thing behind you once and for all. And wouldn’t you know it: you might just come out stronger on the other side.
If money is tight for you right now and you don’t know what to do next, check out our free resources page and learn how to make peace with your money during uncertain times.