Is It Really Important?
An emergency fund is a savings account that has enough funds to be used in times of need.
It’s generally believed that the fund should contain sufficient money to cover three to six month of household expenses.
Emergency situations can include accidents, sudden illness, debt crises as a result of overspending, unemployment
or unexpected expenditures in house and car maintenance.
Financial experts state that having an emergency account is highly beneficial in times of unexpected events and having just to be used for
emergencies allows a person to have a backup plan.
Emergency Accounts Can Act as an Insurance Policy
The savings account set aside for emergency purposes can act as an insurance policy in times of financial crises
or events that require immediate cash. Saving accounts usually have a low rate of interest and this means that the amount
is likely to increase over the period of time even if it is a small increas.
However, you must ensure that the terms and conditions of the account do not prevent you from withdrawing the cash on an immediate basis.
An emergency fund is extremely essential for people that have low credit ratings and are likely to fall into debt crises
as the funds available can help them easily pay off the debt.
Starting a Fund
Initially you must decide on the amount that you can save after paying out your monthly household bills.
The funds usually depend on the number of people in a given household and the income of the earning members.
Once the amount is determined, you should select a bank account for emergency uses and this can either be a savings account or current account.
Each month you should deposit a specific amount from your current account to your emergency account and you can do this by
enabling a direct transfer between both the accounts.
Once the desired amount accumulates in the savings account, you can either stop transferring further cash into the account or use
the excess amount over the emergency cash amount to invest in other liquid assets such as short term treasury bills or another savings
accounts with higher rate of interest.
Using an Emergency Fund
You must use the funds from the account for situations that can be classified as real emergencies only.
The basic purpose of the emergency account is to act as a cushion in times of need and therefore you must not use it
for occasions that are not real emergencies. This may require discipline.
You must establish your financial goals and set priorities that lay out the plan for usage of the fund.
An emergency fund is extremely important from a personal finance point of view irrespective of whether you have a high or low credit score.
Unexpected events come suddenly and having a backup plan considerably reduces the tension you may face in such situations.
The fund effectively reduces the need to ask for finance from financial institutions or other individuals that are likely to
charge interest on the amount loaned. A savings fund to be used for emergencies only
enhances your financial health and gives you peace of mine. This should be one of your basic financial goals.
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