This is why you need an
April 3 2015
Arguably the most important reason you need to gain control of your finances is so that you are prepared when a financial
emergency strikes. When you consider just how many people take out a loan or cash advance because they do not have the
funds to cover an unexpected payment such as a car repair, medical payment or a utility bill that was far higher than normal,
it can really pay to have an emergency fund built up just for those needs.
However, it is important to understand what an emergency fund is, what type of emergencies it should be used for and how
big it should be.
What is an Emergency Fund?
This is a fund that you set aside in your savings account so that you can quickly access it to make emergency payments. The
fund needs to be readily available so that it can be liquidated which is why you should use a savings account as the primary
location of your fund. A savings account can be quickly accessed, yet it also provides an interest rate that will grow over time.
Basically, once you have reached the amount you need to save for your fund, then the interest rate can grow it even further.
However, most savings accounts do not provide for a great deal of interest.
You should not use stocks or other types of similar investments unless you can liquidate them and have the cash in your hand
in less than a day. An important factor in setting up an emergency fund is that you may face two types of emergencies that
may require two different types of funds, short term and long term.
Short Term: This is a smaller fund that you should keep in an account for immediate payments such as a larger than
expected utility bill, car repair or replacing a major appliance. This type of fund should be kept in an account that you can
easily access with a debit card or check. A checking account is a good place if it is separate from your main checking account.
Alternatively, if you have a savings account that you can transfer the money to your checking account then that will work as
Long Term: This is for larger emergencies such as losing your job or when a natural disaster strikes. Here, you should put the
funds in a savings account that generates a healthy interest rate. While it may be more difficult to access, this is the type of
emergency funds that you have time to gain access to when the need arises.
It is important to keep each fund separate so that you do not wind up draining one and have less than what you need to
meet an emergency.
The Size of Your Emergency Funds
You will need to save up different amounts of money for each fund so that you can be fully prepared. That way, you can be
fully prepared just in case the worst should happen.
Short Term: $1,000 to $2,000
Long Term: 2 Months Salary
The short term fund is one that will provide you with a quick, free source of cash to pay off a utility bill or other small event
in a very quick and easy manner. You may want to save a little more if repair expenses for your vehicle or purchasing a new
appliance is a little more, but that will be up to you. To have at least $1,000 in the bank means that for many of the smaller
emergency expenses you won’t have to get a cash advance loan that winds up costing you even more money due to the
While 2 month’s salary is just a ballpark figure, that can be enough to get you through a major crisis until you can either get
back on your feet or find another way to sustain you and your family. For your family, if your spouse works as well, then you’ll
want to have 2 month’s salary from both money earners just in case of a natural disaster or other event that will require even
more money than just a single job loss.
For many, this may seem like an extraordinary amount of money just to have sitting in the savings account. However, it is far
better to have a little more money for your needs than to be caught short and have to find other ways to make it up.
Building Your Emergency Fund
There are several ways you can build up enough money in your emergency funds. You just need to be a little patient and
work it into your saving schedule.
Automatic Deduction: If you can put a little of your check into your savings account automatically, then you should do so.
Choose an amount that will add up fairly quickly, but not enough that it will interfere with your normal payments.
Trim Your Budget: If you can cut your budget by 10%, you can quickly put the rest in your savings account so that you’ll
have the money needed for emergencies.
Pocket Change: Pay for everything in cash and put the change in a container. After about six months you can take it to the
bank and you may have enough to open an account or significantly add to the one you have.
Why an Emergency Fund is So Important
There are many reasons why having cash on hand is so important as it can provide you with the instant relief necessary
without having to take out a loan or payday cash advance. Beside the money itself, having emergency funds brings peace of
mind knowing that you can have a car breakdown or some other surprise that is covered by the cash in your account.
Of course, it will take a little time and discipline to build up your savings, but the end results will be well worth it as you will
have extra cash when you need it as well as developing good savings habits.
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