Especially in today’s economy, establishing an emergency fund is a critical step on your journey to make millions. We all know that life happens, and if all of the sudden you needed cash quick, would you have it on hand? If not, do you know what the long term consequences could be? Here is a look at what an emergency fund is and why it is so important.
An emergency fund is simply a fund that you stash cash into in case of an emergency. Let’s face it, emergencies do happen. What if you came home one day and your furnace had died, what if you had a sudden accident with thousands of dollars in uncovered medical bills or what if you showed up for work, only to find out your job had been eliminated. What would you do? If you have an established emergency fund you can take the money from there without a lot of unneeded stress. If however, you don’t have an emergency fund you will be scrambling.
If you don’t have an emergency fund for when life happens, your options are not the greatest. You could cut into your monthly budget to get by, but what would you have to sacrifice? Would you have other late payments with tacked on late fees? Would you be able to pay your mortgage and put food on the table?
You could use your credit cards, but when would you be able to pay them off? Credit card interest and other fees add up fast, and the long term consequences can be financially devastating. Also, in today’s tough credit world, you may not have enough credit or even be able to get credit to cover emergencies.
Another option would be to take the money from your retirement, but that is not wise either. Most likely you will have early withdrawal penalty fees and depending on the account you may also have to pay taxes on the money. Not to mention that every time you withdraw from these accounts you are taking hard earned money away from your retirement.
The solution is to save some of your money in an easy access account for emergency purposes. The amount you save is really up to you. You need to look at your own individual circumstances. As a rule of thumb, many financial experts will tell you to save somewhere between three and twelve months worth of living expensed in your emergency fund. If you have a stable job, usually the three to six month range is good, but if you are in fear of losing your job, the more months you have saved, the better.
Where to keep your emergency fund is the next question. The key is to make sure it is accessible, while hopefully making a little interest. Some options include keeping the fund in a high yield savings account, , in short term CD’s (Certificate of Deposits) or in a number of CD’s using what is called CD laddering. The goal is to have cash at hand.
As a recap, an emergency fund will:
* Keep you financially prepared for unexpected “life happens” emergency events.
* Keep you from having to rely on credit and in turn prevent you from going into debt.
* Keep you away from your retirement accounts.
* Help keep you from experiencing financial stress.
If you don’t already have an emergency fund, start one today. Work to fund it quickly and then don’t touch the money except for emergencies. Having the protection of the emergency fund very well could help you achieve saving millions.
This article was the result of a joint cooperation with my friend and colleague,
Barbara Montgomery is a freelance writer who specializes in articles and blog posts on numerous topics including banking, finance, debt management, health, travel and more. She is a frequent writer for reliablewriters.com and a guest blogger for DepositAccounts.com, where you can compare savings account rates from dozens of banks in one place.Keep your comments coming, with wise Investing and great ideas.