Get Started on Setting Up an Emergency Fund

08
June

When it comes to planning out your finances, things like paying off debt and retirement planning tend to get a lot of attention. While these issues of your financial life are definitely important, another issue may be even more important, depending on your situation. Starting an emergency fund is a step that many people skip over when planning out their financial lives. In reality, starting an emergency fund could provide you with the peace of mind that you need to tackle the other areas of your finances.

What is an Emergency Fund?

An emergency fund is an amount of money that you keep in a secure location that you can use for emergencies only. Typically, people put this emergency fund money in a savings account, or some other place that it will not be touched. The money in your emergency fund should only be used to pay for expenses that cannot be avoided and were not expected. For example, if your car breaks down and you have to pay for the repairs, this would constitute a legitimate expense from your emergency fund. If you find a good deal on a big-screen TV, this is not a legitimate expense for your emergency fund. You only can spend the money from the fund on things that are vital. If you waste the money on things that you don’t need, it kind of defeats the purpose.

How Much to Save

The amount of money that you put in your emergency fund can vary from person to person. As a general rule, you should set aside at least $1,000 for an emergency fund no matter what your financial situation is like. Then once you get the other areas of your financial life in order, you can boost the fund up to a higher number. At that point, you may want to set aside enough money to pay for your monthly expenses for three to six months, if possible. This way, even if you lose your primary source of income, you’re going to be able to stay afloat financially until you can find something else to do.

Pay Debt or Build Emergency Fund

If you have a large amount of debt, you may be tempted to put off building an emergency fund and instead focus on paying down your debt. While this is a , strategy, it is probably not in your best interest. Instead, focus on building up your emergency fund to the $1,000 level and then pay down your debt. If you don’t have some kind of emergency fund and you focus on paying down your debt, what will you do when an unexpected expense comes up? What happens if it’s in the middle of summer and your air conditioner breaks down? You will probably have to pay for the new air conditioner with a credit card and your debt level will rise. If you had some money put back in savings, you could then avoid accumulating more debt when something comes up.

Considerations

When it comes to building an emergency fund, you should put the money somewhere that you can access it during an emergency, but don’t put it in a regular checking account. You don’t want to be tempted to take the money out and spend it on something that you don’t really need. If you can put it in a high-yield savings account, you can even earn some interest on the balance while it is sitting there. Just make sure that you don’t have to pay any penalties to take the money out when an emergency actually does come up.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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