Why You Should Create An Emergency Fund

Both conventional wisdom and professional financial planning advice insist that an emergency fund is an essential part of managing your money. However, many people do not fully understand how an emergency savings account can be a benefit to them. They may regard creating and maintaining an emergency fund as merely one more financial obligation, or they may feel that the money in the fund could go to a more enjoyable and better use.

But the truth is that one of the important things in life is to be prepared for an unexpected major expense. It’s like your own insurance policy. Having an emergency fund on hand can make a world of difference to your finances in the long run.

Here is how you can set up an emergency fund.

Set A Goal

A modest goal for an emergency account is to have funds on hand that will equal at least three months’ worth of take-home pay. Many financial planners recommend that you save until you have six months of salary put away. If you feel like your job may be in jeopardy you may want to put away even more than that. This may sound impossible to accomplish, but it can indeed be done.

Reduce Your Expenses

To start your emergency savings account, trim your expenses wherever you can so that you live on considerably less than you earn. It will be difficult at first, but you won’t have to do this forever. You will only need to make this sacrifice during the time you are building up your emergency account.

Set A Goal

Set a goal of saving a certain amount every month and be consistent about meeting that goal. If you feel you lack discipline, arrange for an automatic deposit from your paycheck to your bank. This strategy is helpful because when the money never passes through your hands, you will tend to miss it less.

Use A Money Market Account

It is also important to use an appropriate account for your emergency fund. You wouldn’t want to keep the money beneath your mattress, as it wouldn’t earn a penny of interest. Money market accounts are ideal in several ways. Unlike certificates of deposit, they allow you access to your funds on short notice; this is absolutely necessary for an emergency fund.

At the same time, your money in money market accounts will earn a rate of interest that is higher than you will usually get from a standard savings account or possibly even an online savings account. This means that the balance on your emergency savings account will grow more over time and thus, will prove more useful to you when you must deal with an emergency situation.

About The Author

Edwin is a marketer, social media influencer and head writer here at Save The Bills. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

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