Having An Emergency Fund is Crucial To Preparedness

You should always make an attempt to anticipate the unexpected in life; and it is for this reason you need an accessible emergency fund to be better prepared for an unforeseen emergency. Although this is pretty common financial advice, most people fail to follow it. Clearly, people who don't engage in openings emergency funds have a difficult time saving money, even if they know they should.

Personal financial crises can take the shape of mounting and unpayable debt, the loss of a job, and snowballing medical expenses. You should never have to depend on a loan with high interest rate (such as pay day loans) or a credit card to make ends meet.


Several Other Reasons To Have An Emergency Fund

Stop getting into debt

When an emergency comes knocking on your door, and you do not have an emergency fund on hand, the first thing that will be happen is that you will stop paying your debts. Furthermore, you will begin using your credit card to pay for the emergency, whatever it is, and consequently you will be deeper in the debt hole. An emergency fund precludes the need to use your credit card to pay for expenses.

Make up for deficits in your budget

If unexpected things happen, you will not have to continually overhaul your budget to pay for these things. With the help of an emergency fund, budgeting will be much simpler.

Stop paying late fees

If you are getting by paycheck-to-paycheck, there will be times when you may have to pay a bill late, or have to overdraw your bank account. By having an emergency fund set aside, you avoid these financial potholes.

How Much Money Should You Save?

In general, you should set aside enough money to cover up to six months of your living expenses. However, specific personal circumstances -- whether or not you have children, are in debt, or have other outstanding financial problems -- will determine how much money you should save.

The main purpose behind saving between three to six months of expenses is to cover expenses in the sudden loss of income. Bills still have to be paid in the event you or your partner loses his/her job. In addition, it may take several months of diligent search to land a new job. Therefore, the best thing to do is to always plan for the worst case scenario and set up an emergency fund.

How to Begin Saving

Most of us in the West are alien to the notion of saving for an emergency fund for the simple reason that emergencies that warrant the establishment of such funds are usually hard to come by. Well, so was the case until the financial crisis hit. If you don’t have an emergency fund set up or feel it difficult to set some money aside, you should start saving gradually -- bit by bit. You should, however, note that saving money takes plenty of time, especially if you want to have 6 months worth of living expenses saved. It is best to start out small, and gradually build up from there. As time passes, you will get better at saving and reaching your set goal.

Some experts will say that the best way to get started is to open a new bank account specifically for your emergency fund. I am of the opinion that a portion of your emergency fund should be in cash and with you in a safe location. What will you do if there is another severe financial crisis, where a limit to monthly bank withdrawals is placed.

If you do not have a substantial amount of money to save, it doesn’t matter — the crucial thing is just to start. A mere $30 per paycheck can be sufficient and good enough start. The sum will slowly grow each with each incoming paycheck, and you will be more than satisfied to see that money is accruing in your savings account, which in turn will motivate you to continue saving even more. Some choose to have their banks deduct a specific amount from their paychecks (payroll deduction) and deposit it automatically into their emergency fund. This strategy is great if you have discipline issues, and it makes the whole process of saving automatic. There are plenty of additional and common sense ways of saving money and funneling the savings into your emergency account -- just be imaginative.

However, should you open up a new savings account, the best to do is to get into the habit of making regular deposits into this account. You can choose how often you make the deposits, but make sure that you stick to your schedule. If you happen to miss make a deposit, be sure to compensate for it the next time you go to the bank. Saving money should eventually become automatic.

Where to Keep Your Emergency Fund

In general, it is best to begin saving in a conventional savings account. A savings account is both convenient and simple to use. It is absolutely vital to keep your emergency fund liquid so that you can get access to the money as quickly as possible in the event of an emergency. Moreover, you should not have your money in the stock market or in other financial products as they are all susceptible to market volatility, which could result in having your savings wiped out or lessen in value in the short-term, just when you may need them.