Monday April 30, 2018 - 15:10:18 GMT
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Everything that you need to know on emergency funds – Why you need one
Are you someone who is treading on the path of making your finances better and organized? If answered yes, you have to consider the concept of rainy-day or emergency savings as without this, it is impossible to fight your critical emergencies. Who would help you if you needed emergency money? Whom should you approach? Instead of loitering around and approaching friends, family members or pawn shop lenders, don’t you think it is better to keep building your own emergency fund?
What would happen if you suddenly lost your job tomorrow? Would be able to pay the bill of your vehicle’s transmission broke? Or would you have to borrow money for such sudden expenses? Majority of the Americans claim that they can’t bear these expenses.
Emergency funds – Boring and confusing yet downright necessary
Just as you shouldn’t drive your car without an insurance policy, similarly you shouldn’t live your life without emergency savings. They are the most vital part of your entire financial plan and once you start building it, you will owe it to yourself. Before we move on to discuss what an emergency fund is, let’s check out what it isn’t.
√ It is not an account that is used for planned purchases like a new car or a house or college education
√ It can be started with a small amount and not always an unattainable amount
√ It isn’t any fixed amount for everyone as it can differ according to the person’s lifestyle
So, now that you understand what an emergency fund isn’t, let’s check out what it comprises of.
Emergency fund – Why do you need one?
Once you have an emergency fund, it serves 2 different purposes:
¤ Creates an economic safety net to help you combat against unpredicted emergencies like illness, job loss or a sudden expense out of nowhere
¤ It helps you avoid the usage of credit cards during an emergency
There will arise several times when you will require seeking help of your emergency fund. While some situations will be severe, some others might be scary. Now that you’re acquainted with the reason you need such a fund, start building one.
Best ways to start
#1: Create a bank account buffer
The foremost step that you need to take is to build a bank account buffer of around $500-$800.Whenever you’re in debt, you will feel the urge to devote any extra money towards the debt but keep in mind that building the bank account buffer is more necessary than that. 3 ways in which you can assemble extra funds is by reducing your discretionary expenses, curbing the recurring costs and earning more. Once you gather funds, maintain the emergency fund in the form of CDs, stocks or bonds as it is vital to keep them liquid.
#2: Build the emergency account
Now that you’re done with the bank account buffer, it’s high time you begin building the emergency fund. Building this fund will be similar to creating the bank account buffer. In case you’ve reduced spending or you’re earning extra income, a part of the cash should move towards the emergency fund. Set up direct deposit, bill yourself and add any bonus money for creating the emergency fund.
Therefore, when you’re wondering about the ways in which you should save for an emergency, you should take into account the above mentioned factors.
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