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How to Build An Emergency Fund That Meets Your Needs

Posted by : Premraj | Posted on : Saturday, January 18, 2020

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One of the most important things you can do for yourself financially is to create an emergency fund. It should be one of the main goals you have in terms of money and finances.

An emergency fund is something that you would rely on to pay an unexpected bill, or to replace your income. You might need to replace your income if you were for example, to lose your job or become sick or injured and not be able to work for a period of time. Along with calculating lost earning potential that could happen as a result of an injury or another unexpected situation, there is some planning that should go into the creation of an emergency fund.

Reasons You Need an Emergency Fund

An emergency fund is something that you put in a low-risk account so you can avoid borrowing money if an unexpected situation comes up. A financial buffer, emergency funds can provide you with more financial security and also peace of mind, which is often invaluable.

If you were to face an unexpected situation and you had an adequate emergency fund, you wouldn’t theoretically have to rely on credit cards or get high-interest loans.

How Much Money Should You Have in Your Emergency Fund?

One of the tough parts of planning for an emergency fund is figuring out how much you should have in it, and then, of course, being disciplined enough to set that money aside.

There are different things to think about as far as calculating your needs for an emergency fund, and the amount is going to vary for everyone.

If you have two income earners in your home, then you might just set aside three months of expenses. If you’re a one-income family, you might want to set aside enough money to cover six months of expenses.

If someone in your house has a chronic illness, you might want more in your fund to cover unexpected hospital visits or time off work.

The general rule of thumb is to make sure you have at least three-to-six months’ worth of expenses in your account. These expenses should include all of your necessities like your mortgage or rent, food, car payment, and anything else that you have to pay for.

What Kind of Account Should You Use?

The key with an emergency fund is that it is liquid and highly accessible as soon as you need it. It needs to be in its own separate account, to reduce the temptation to use it in non-emergency situations.

An investment account won’t work because there can be barriers to getting access to the money when you need it, and there is a sense of risk with investments that won’t work for an emergency fund.

Instead, a high-yield savings account is a great option. It’s safe, and there’s no risk associated with it, your money is accessible and you can even earn some interest on it while it sits idle in the account.

How to Build an Emergency Fund

It can feel tough to build an emergency fund, especially if you’re living paycheck-to-paycheck, but it is possible.

First, you may want to look at your current budget and find places where you can cut expenses, and then put that money into your account.

Finding one-off opportunities to earn income also work for an emergency fund. For example, maybe you take on a freelancing project and put all the money you earn in your emergency savings account.

To have an emergency fund, you need to have a firm budget that you set and stick to. You want to be able to clearly see your income versus your expenditures at any given time, and make saving for your emergency fund one of your budgetary goals.

Set a monthly savings goal for yourself that’s realistic, and help yourself stick to it by automating it. You can set it up so that money goes directly into your emergency fund as soon as you get paid, and then you don’t have to think about it or be tempted not to add to your savings.

An emergency fund should be a priority even beyond your retirement account. Once you have a comfortable emergency fund, you’re in a better position to start moving on to other financial goals you may have, such as creating your retirement account, investing in the stock market, paying off your debt or saving for a down payment to buy a house.

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