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How to Put Together an Emergency Fund

Thursday, October 23rd, 2008

Have an emergency fund.

If you are concerned about the state of your finances, your job or if you would just like to have a safety net that will be there to catch you if something goes wrong, an emergency fund is a very powerful tool to have in your financial arsenal. Emergency funds can be used for just about anything and these are the proverbial “rainy day” funds that can help you stay afloat when the worst happens. Since we can’t control everything in life, it’s always nice to know that you do have other options to keep you financially solvent.

Setting up an emergency fund is actually quite easy and although it can take a few months to get to the point where you won’t have to worry, you’ll have the satisfaction of knowing that you’re saving ahead for your future. This makes it a lot easier to keep going and keep working on building up that emergency fund.

The average emergency fund should contain at least enough money to pay your expenses for three months. Ideally, it should be for six months to a year, but the key is to get started and worry about the actual amount later. Once you have your emergency account set up, adding to it is the easiest part.

So, you’ll need to sit down and calculate how much money you make a month, and how much you are spending. Use one month as your basis for the average amount of money you would need and you can go from there. The main use for an emergency fund is typically to cover you if you end up losing your job, so use this as your template for building up your emergency fund.

Once you have a better idea of how much needs to go into your emergency fund, it’s time to get started on where you will be keeping it. While burying it in the back yard is out of the question, it is important to keep your emergency fund in a place where it can be quickly accessed. A savings account with a debit card or checks that you can write is ideal in this situation since you’ll be able to quickly withdraw your funds if necessary and you won’t have to wait for business hours if you are in the midst of an emergency.

Your emergency fund should not be tied to your regular checking account or any other account. This can help cut down on the temptation to spend your rainy day money while it is still quite sunny out. Remember, whenever you are tempted to dip into that account, what could happen if you lost your job today. Would you have enough money to pay all of your bills, and keep your house and car? This is very good motivation if you are having a difficult time keeping your hands out of the till. Work towards a bigger goal with your emergency fund and don’t forget to keep adding to it to make it grow further.

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