Importance of Emergency Funds

The reality for many people is that they are one job loss or one major medical emergency away from financial disaster. Unplanned financial costs seem to happen when you least expect them and are the least prepared to handle them. Given the current economic climate, having an emergency fund to handle these expenses is more important than ever.

If you are like most Americans, you use a credit card to pay for the unexpected car repair or new water heater. If you have used nearly all of your available credit on your cards, you may find yourself in a serious financial situation and be forced to look for cash from high-risk personal loans or car title loans.

Experts agree that everyone should have a cash reserve that is meant to be used for emergency situations. This doesn’t mean the funds are there to purchase a new television or use for a weekend getaway. An emergency fund is exactly what the name implies- for emergency use only.

Having emergency money allows you to pay for these unplanned expenses without using a credit card and going even deeper into debt. An ideal emergency fund should equal three to six months of living expenses, as a minimum. With unemployment still at a high rate and a sluggish job market, it’s suggested that everyone has at least six months of savings so that normal living expenses can be paid (including the mortgage or rent) in case of a job loss. If you are self-employed or a contractor, one year’s worth of living expenses in your emergency fund should be your goal.

If you have never had a savings account or emergency fund before, it all may seem overwhelming to you. The important thing is to begin now so that you can be prepared for the financial surprises life throws your way. Here are some good suggestions to get you started.

Set a goal for yourself. Go over your bills and estimate how much you need every month to live. Include all of your expenses- mortgage, car payments, utilities, insurance, etc. Then multiply this number by three (at a minimum) or 6 (even better). This will tell you what amount of money should be in your emergency fund. The more you can add to this fund, the better off you will be.

Set up an automatic payment. Contact your bank or employer to set up an automatic deposit from your paycheck to your savings account (emergency fund) every time you get paid. This way you never see the money and your savings will slowly grow without your having to think too much about it. 5% of each paycheck is a good number to start with but if you can do more, then increase it.

Be sure to research financial institutions to find the best rate on your savings account. Interest rates are universally low right now, but shop around for the best deal and make sure your money is safe and accessible.

Don’t touch your emergency fund. The reason most people don’t have emergency money is that they think they have an emergency every month. Buying a new dress for a party is not an emergency. Neither is purchasing a new, bigger television. Unless you have no food in the house or are about to be evicted from your residence, leave your emergency fund alone.

There are options, in addition to having an emergency fund, which can be useful when faced with an unexpected financial need. Find out how to borrow $25,000 or more without collateral.