What is an Emergency Fund

What is an Emergency Fund

What is an Emergency Fund?

An emergency fund is a sum of money that can be used for unforeseen expenses. These funds are mostly placed in an interest-bearing account and can be easily accessible in the event of financial hardship.

Benefits

When a person experiences a sudden loss, such as a medical expense or job layoff, it’s hard to pay for the necessary bills with ease. 

An emergency fund can help provide money when you need it most. Your emergency fund can serve as a temporary financial lifeline, but it isn’t meant to be relied upon forever. 

If you continue to misuse the fund, you’ll soon find yourself back in the same financial bind from before. Save money slowly and sparingly, and keep all bills paid promptly for lasting benefits.

How to Create: Emergency Fund Account

Before opening an emergency savings account, you should develop good fiscal habits by creating an effective budget. You must thoroughly understand your monthly income and expenses before devoting any of your earnings to another account.

 It’s also wise to earmark some of your income for an unexpected bill or other emergencies. This ensures that you don’t touch the money that you’ve already allocated for other purposes.

Here are important steps to help you create an emergency fund:

1. Decide how much money you need in your emergency fund

If you are unemployed, it may require several months’ worth of living expenses at first. it might only take three weeks’ worth of living expenses. Remember that it can’t really hurt to have too much money in an emergency fund because it will earn interest while sitting there waiting for you.

2. Decide where you will keep your emergency fund money 

 This can be in a savings account, CD, or another type of account. It is best to keep it somewhere where you can easily access the money and for which there are not many fees associated with the account.

As always, it’s good to use an interest-bearing account so that your funds gain value over time.

3. Set up a direct deposit from your paycheck 

You should authorize direct deposits into this emergency fund account each month until you’ve saved enough money to cover three months’ worth of living expenses (or however long you want it to last).

If you want someone else involved in managing your emergency funds, set up automatic transfers from their bank accounts as well.

How Much Should I Put?

Many experts agree that your emergency funds should have between three and six months of income saved, but some people can afford more or less.

Your individual needs are unique, so think about your finances carefully before devising a savings plan. Don’t be scared off by the idea of an emergency fund; it takes discipline to save up this amount of money, but the benefits are well worth it.

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