What Is An Emergency Fund?

by Pam on August 10, 2013

do you have an emergency fundHave you ever heard anybody tell you that they have just built their emergency fund? If you have, then did you ever ask them what an emergency fund actually is? I ask this because most people that I talk with have no clue what an emergency fund is or why it is important to their financial future.

What you need to know is that an emergency fund is where you save money for emergencies only. For example, losing your job would be considered an emergency. This is also the reason why an emergency fund should be at least 6 months of your total monthly expenses. Now, I know that saving this much money could be rather difficult for you but the nice thing about having it is that it will make the rest of your life that much easier. Trust me, everybody that has a 6 month emergency fund is stress free and on their way to a successful financial future.

How To Build An Emergency Fund

The first thing you must do is figure out how much money you need each month. Once you do this you will be able to multiply that by 6 and figure out exactly how much you need. This number is better to have high than low, so you need to make sure you add a few hundred or even a thousand dollars to that figure.

The next thing you will need to do is look at your budget and see where you can reroute money so that you can begin to fund your emergency fund. This is very important and in my eyes it is more important than paying off your debt, so make sure you do this first and then move on to paying off debt.

Lastly, you must have a complete emergency fund before you do anything else. Don’t buy a new house or new car if you don’t have your emergency fund in place. Also, never take money out of this fund for any reason other than an absolute emergency. Missing a payment on your credit card is not an emergency. An emergency is when you are about to lose your house, you don’t have any money to eat, you need to pay for a medical bill, your family member is hurt and needs money right away or something of that nature.

So, do you see why an emergency fund is so important? Good, now go on and build one of your own.

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