Building An Emergency Fund

None of us have the ability to foresee the future or predict the hurdles which lie ahead of us. This makes building an emergency fund a financial priority. Building an emergency fund is healthy for your financial well-being since you’re rarely given advance notice of a setback or an accident that will keep you out of work for an extended period. It is also a safety net that can save you from bankruptcy or severe financial hardships in the event of an unexpected change in your income or expenses.

Housing a small rainy day fund should be a vital part of an individual’s financial goals. This is extremely important if you don’t already have available funds in your account for covering these unanticipated expenses. And yes you will have unexpected expenses! They provide financial security because the fund gives you something to fall back on if you become ill, or if you or your spouse loses your job, you incur large medical bills or have an unexpected large bill such as a major car or home repair. You do not want to end up in a situation where you have to buy daily necessities on credit and end up with payments on groceries you bought two years back on credit, with 10-28% interest. Saving your money in a separate account for emergencies is definitely a better alternative to taking a loan or cashing in your long-term investments. If you take a loan, there is the additional burden of paying interest. Pulling cash from your investments before maturity means not only that you will lose out on the interest, but also some part of the original investment. This will set you back significantly in your overall financial plan.

Success at building an emergency fund depends on the consistency of saving money on a regular basis and resisting the urge to dip into this rainy day fund for non-emergencies. This money should be kept separate from the general savings account. Otherwise, you will be tempted to dip into these monies even if you simply run over your budget at certain points in your life. A substantial part of this emergency fund account should be invested in low-risk mutual funds. This ensures that your investment does not lose its value in case you need the money. Also, it should be extremely liquid, to give you access to the cash easily and quickly if needed. The size of the special savings account will depend on your personal situation. People often keep three to six months’ salary in the reserve. But you will have to decide on an appropriate amount based on factors such as your dependants and fixed monthly expenses. If you are single with no obligations and have a reliable support system of friends or relatives during a financial crisis, you might not need a substantial amount stashed in this fund. This is opposed to someone who needs to pay nursing costs for his aging parents and supporting a young family. The more people you support, the more likely you are to have unexpected or unplanned costs.

While making a decision about an emergency fund, you should also take into account the degree of difficulty you'd have in finding a new job if you lost the present one. In the case of a two-income household, the contribution of both parties should be weighed while calculating how much you should keep aside. You may not be able to gather your emergency fund money all at once. Treat it as a financial goal and add to the kitty over time. If you get a tax refund, put it in your special rainy day account. Maybe a part of your bonus at work.

You can do this!

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