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             10 August, 2022

Category:  Articles » Finances


Building an Emergency Fund

         Views: 2671
2009-11-22 05:25:56     
Article by Mel Jensen

Many people are not sure what is meant by Emergency fund so I wanted to explain what that is. An Emergency Fund can save you from many different life changing events and everyone should have one.

An Emergency fund is money that you have set aside for only emergencies. You don't use it for anything other than serious emergencies and if you ever use it or even a portion of it, you repay everything you take from it as soon as possible.

The size of the fund depends on your family and the expenses your family has. No family has the same fund as no family has the same expenses or needs. When I was talking with a family about credit and building an emergency fund I would sit down with them and explain how this works. You setup an Emergency Fund to help you pay for unexpected emergencies. Those emergencies can include the loss of a job by either a one or two income family. You want to plan on worse case scenarios such as both of you losing your job at the same time. It may include a major car repair such as the need for a replacement engine or transmission (or both). Another type of emergency is life changing medical issues (which is what happened to me). Have a major hospital stay along with health issues that may or may not allow you to go back to work. These are the true emergencies that can and will change your financial future.

So when you are planning your Emergency Fund starts with 6 months as your guideline. You need to sit down with your family and build a list of your monthly expenses. You need to write down everything that you need to spend money on each month. That is right everything you spend money on each month. Now that does not mean that you don't want to weed out what your spending money on to determine what you can leave out each month if an emergency arises but you really want to see what your spending money on each month.

After you have a clear list of what you spend your money on each month, go through that list to see if you need to budget any of those expenses. Additionally, now you can literally see what your family spends each month.

Now take that figure and multiply it by 6. That is your figure for your Emergency Fund. Now you don't have to have it immediately but you want to be aware that each month you don't have it you are gambling with your financial future. You want to make a decision about one of two things.

You want to either reduce your debt or build your Fund. The decision is in your hands but both of those are critical to you. Either reduce your debt by paying down as much as possible each month or start putting as much money as possible into your Emergency Fund. When you have your Emergency Fund with the appropriate figure then start paying down your debt. Your financial future will be in a better position if you have your emergency fund and you have paid down your debts.

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