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Emergency Funds and Why You Need Them | Print this Article |
An emergency fund is money that you have set aside to specifically cover any unexpected expenses that may come up. An emergency fund may cover unexpected car repairs, medical bills or other emergency situations. You may also use an emergency fund to help pay your bills when you are unemployed. You should also prepare for unexpected events with a solid plan in addition to your emergency fund. What to do if the need arises!
Initially, you may want to start with a small emergency fund of one to two thousand dollars if you can afford it. If not, start small and have a small amount of a checking account to be automatically put into a savings account. Your workplace may do that from your paycheck. Eventually you should build your emergency fund to cover three to six months of expenses. If you work in a field where lay-offs are common you should save more rather than less. As you begin to master budgeting, you will create sinking funds for many expenses, and your emergency fund will be there primarily to help you if you were to lose your job or you were unable to work for a period of time.
Emergency funds should be held in an account where you can access them fairly quickly and should be very liquid without penalty to access. This might include a good money market account or a high interest savings account. You may also consider using a laddering of CD's. It's important to realize that you are not going to make money off of your emergency fund so select the right one. It is important to remember that you are saving up to cover your expenses and not your income.
You can also cut back on many of your expenses to make your money last longer. You may want to set up a trial run now, which will show you the items you need to cut out immediately if you were to lose your job. This will make doing it easier, and give you one less thing to worry about as you work to bring your income back up.
In addition to a good emergency fund, you should make sure you are carrying adequate insurance for your family. This can cut down on all types of unexpected expenses and give you additional peace of mind. A life insurance policy is essential if you have children. Once you have taken care of these basics, you can begin to build real wealth and live comfortably.
Although it may seem like a sacrifice, setting aside money in an emergency fund can provide you with true peace of mind. It can help you through otherwise stressful situations and make it so you can just focus on taking care of the problem instead of worrying about finances during a crisis. The sooner you start on your emergency fund, the sooner you can take advantage of these benefits.