Personal finance can be difficult. If you find that you struggle to maintain a budget, you’re not alone. But if you end up in a bad situation that requires a lot of money, it’s important that you have prepared yourself as much as possible. One of the best ways to make sure you have money set aside is to designate an emergency fund.
An emergency fund is simply an account that has money that can only be used for emergencies. The best way to start one is to designate a certain portion of your paycheck that will be placed in the fund – perhaps 5-10 percent. It often helps to start the fund with a decent sum of cash. You should have a goal in mind when you start depositing into your emergency fund – try and reach a specific dollar amount before you stop depositing money into the fund.
Where to Keep Your Fund
An emergency fund should not be in any form of investment account. You shouldn’t be trying to earn a risky return on the capital that you put into your emergency fund. This money is set aside to be able to be accessed whenever it is needed, so it shouldn’t be in a fixed-term deposit or an index fund.
Instead, the money should be placed in a savings account that has no restriction on access. You should be able to withdraw money from it instantly in case an emergency happens. You don’t want to have to wait days for funds to transfer if a true problem has occurred. We suggest talking to your bank about what type of savings accounts they have that can be easily accessed. Many banks will still offer a healthy interest rate on savings accounts that aren’t fixed term.
Reasons for an Emergency Fund
There are a variety of different reasons you may decide to start accumulating an emergency fund. It’s important to recognize the various risks you face – financial health is a serious issue for many Americans, it’s a subject that should be taken seriously.
Natural disasters cause a range of financial issues for families. If you’re not prepared for a disaster, you may find that the damages run into the tens of thousands. If you’re not insured, you won’t have any way of getting compensation. Even if you do have insurance, the deductibles you have to pay can often be very large if there is extensive damage.
A natural disaster may also prevent you from working for a short period of time. If you own a business, it may mean that you can’t conduct business until the community is back in order. Either way, it’s money out of your pocket. An emergency fund can help cover funds in the time after a natural disaster.
If you lose your job, the expenses that you have won’t go away. It can be months before you find employment again, and applying for social services can take weeks. It’s important that you have money set aside to pay for bills, mortgages, rent, and other expenses while you’re unemployed. You should never overestimate your job security!
Medical bills in the United States can get truly out of control. If you end up having a long hospital visit, your bills can run into the hundreds of thousands. This is especially true if you don’t have insurance. Depending on the type of procedure you’re undergoing, a health professional may want you to put a deposit down.
Medical care is something that you can’t afford to miss out on. It is literally a matter of life and death. That’s why it’s important to make sure that you have an emergency fund to help cover these types of costs. You don’t want to have to forego needed medical attention for you or your family because you haven’t saved enough money.
Vehicle damage is another issue that can end up costing you dearly. If you rely on your vehicle to get to work or take your kids to school, you’ll need to be certain that you are able to fix it if it breaks down. In addition, you may have to rent a car while it is in the mechanic for repairs. If you live in a city that doesn’t have great public transport, not having a vehicle can be extremely difficult.
Once you begin saving money, it’s easy to think it’s okay to spend it. But this type of mentality will result in you staying stagnant financially. The reason an emergency fund is so hard to keep is because it’s so hard not to spend the money when you have it saved. You need to make a firm commitment to yourself not to spend any money in the fund unless the scenario meets something that you truly deem an emergency.
Taking back control of your personal finances is about taking control of your expenditure and making healthy financial decisions. Starting an emergency fund is the perfect way to start implementing this type of behavior.
You owe it to yourself and your family to start an emergency fund. Not having money set aside for a problem can result in you not being able to meet your financial obligations. You may have to sell your home or other valuable assets to help cover costs. If this is not an option, you may even have to take out high-interest debt. This has the ability to impact your financial viability long into the future. You can also consider credit card consolidation for bad credit if you’re trying to reduce the number of bills you have but don’t have the credit score to get some loans.
It can be hard to recognize why you need one of these funds until it’s too late. But one thing is for sure, having a healthy emergency fund helps give you the peace-of-mind that you’re prepared for a cost if it arises. This will reduce financial stress for you and your family.. An emergency fund does more than just help you pay off immediate costs, it also helps you avoid problematic financial agreements in the future. Continue to the next article where we cover the fastest way to pay off credit card debt.
Financial Advisor, DCL
Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.
Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.
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