Saving and Emergency Funds

It is also very important to remember to establish a savings/emergency fund. Studies show that most Americans are only a couple of paychecks removed from being homeless. If job loss, disability or the death of a loved one would leave you with no resources, how would you survive? Never overlook the importance of maintaining adequate savings. Simply stated, if you do not save, you will not have money for the future. Plan, plan, plan. It is important to be responsible with what you have.

Your savings/emergency fund should cover your expenses for three to six months. After you have established and stuck to a budget, it is surprising to see how quickly that amount multiplies. After you have saved a year’s worth of expenses, it is a good idea to convert half of that amount into a retirement nest egg, a college education fund or some other investment account that will make your money work for you. Then, start the process all over again.

Why You Need One, How Much You Need, and Where to Keep It

Life is filled with challenges. Things happen. Because they often happen unexpectedly and require money, it is important to money set aside to address these situations. An emergency fund, typically equal to six months of income to take care of basic living expenses, is an appropriate sum of money to have to address any shortcomings. If you fail to maintain this amount, you are living on the edge. It is important to get started right now because we never know what tomorrow holds.

Success in building an emergency fund depends on financial discipline and your ability to resist the urge to spend the money on necessities or wants that are non-emergencies.

Why You Need an Emergency Fund

An emergency fund is a necessity to insure against financial hardships or downfalls. Too often citizens are faced with layoffs, family illnesses, disabilities and other emergencies that exhaust your typical savings. Being without work for an extended period would place undue pressure on many families, especially those who do not have large sums of money reserves or families with significant resources. Therefore, an emergency fund can defray the high costs associated with long bouts of illness, disability and unemployment.

The failure to have an appropriately funded emergency fund may force you into an uncompromising position such incurring credit card debt, taking out expensive payday loans, pawning valuables and using other fringe financial services. These are not viable alternatives to maintaining a well funded emergency fund.

How Much You Need in Your Emergency Fund

It is important, given the fluctuations of employment and the changing economy, to have at least six months of income to take care of your basic living expenses. The suggestion to hold six months or more of income is based on the consideration of how difficulty it will be to find a new job, address potential family emergencies and provide for other emergencies.

It's best probably better to open a new account, potentially a savings account, that will keep these funds away from resources used to address daily expenses. These funds should be placed in an account that is hard to access so you won’t be tempted to tap into it to buy that new dress, pair of shoes, watch, car, tools, etc. Keeping your purposed funds separate makes life easier.