Why You Need an Emergency Fund

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My childhood was full of domestic violence and major money issues. Even as a kid I stressed out over our family finances. Ultimately, I was afraid that my family would become homeless and have to live on the streets. It wasn't that our bills were high but rather that the family income was almost non-existent most of the time.

Growing up in this environment taught me a lot of good and bad lessons. One lesson that I learned early on and that stuck with me was the importance of a savings account. I vowed to my wife when we got married that we would never have less than $1,000 in our bank account. Doesn't seem like much, does it? If my family would have had a thousand dollars in the bank when I was a child dozens of fights would have been avoided. Fixing a broken down station wagon wouldn't have caused a major crisis. And, as it happened time and time again, my father losing his job wouldn't have brought the family finances to it's knees.

The truth is, unexpected ("emergency") expenses happen and there is no way to avoid them. It is these types of expenses that destroy an otherwise healthy budget. Everyday life is good. You drive a nice car, live in a nice house and then BAM! Someone runs you off the road and causes $500 damage to your car. Your deductible is, you guessed it, $500. Now what? If you had a $1,000 in your emergency fund this would be a no-brainer. Go grab the cash and get the car fixed. Wait, you say you don't have an emergency fund? OK, so you will need to credit card the fix. Fine. Now, your $500 deductible will cost you $650. Yes, if you are like the majority (a very high percentage!) that don't pay their credit card bill in full each month, you will pay an extra 30% before all is said and done.

Start an Emergency Fund

The best case scenario for an emergency savings account is 3-6 months of living expenses. We aren't looking for the "best case" to get started however. We just want something. Start with $1,000.

Where do I find money for my Emergency Fund?

Have a yard sale, do some part-time work, put in some over-time, mow someone's lawn, or sale some junk on Ebay. Be creative and make your emergency fund a priority.

TIP: Keep your Emergency Fund Liquid

What this means is that you keep the funds out of sight but readily available if you need them. Use a money market or interest bearing savings account or lock it in your safe at home (the interest on $1,000 isn't going to be that much anyway). Liquid means it can be turned into cash quickly. It is not tied up in a bond, mutual fund or something of that nature.

What to do in an emergency

Stating the obvious, use your emergency fund to pay the bill. Even $1,000 will cover most of life's annoying unexpected expenses. The next step is to replenish your emergency fund ASAP. Make that your priority. Once the emergency fund is back then you can get back to KOing your debt or investing.

Building an emergency fund should be your top priority if you don't have one. Life is not perfect and things will happen. Unexpected expenses destroy the monthly budget. Start with $1,000 and work your way up to 3-6 months of your living expenses. A healthy emergency fund will give you confidence and financial peace of mind. Try it and see!

Craig Kelley

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Craig is the author of How to Get Out of Debt and an avid blogger. He strives to help people maximize their time and succeed financially as well as personally. He has been a leader in several start-up companies including Mokumax Virtual Domains & Servers, Inc. and currently HealthcareSupplyChain. Read more...

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