1. What is an emergency fund
What exactly is an emergency fund? It is like a savings account, where your money is pooled in case you need to make a big purchase such as a big home repair or vehicle repair. Your emergency fund must be separate from your regular accounts, say your checking or saving account, or even the 401(k) retirement account you may have. Your emergency funds should only be used for emergencies and like any other accounts, should accumulate only what is absolutely necessary for its well being and protection.
There are three basic types of emergency funds. The most common is a checking account and is usually the easiest to set up. A savings account, like a money market account, has minimum requirements for borrowing and lending. It may take more work and greater risk to invest your money with these, but they have greater flexibility. If you need a lot of money in a hurry, a savings account is probably the best choice.
Another option is a credit card that offers emergency funds. This might be the best choice if you already have a savings account. Most credit cards will let you choose how much money you want to put in to your emergency fund each month. You could decide to put in six months’ worth of expenses as an emergency fund. You would use this fund in cases where you might lose your job or have an unforeseen expense that occurs suddenly.
In contrast, you can also use a high-interest savings account as an emergency fund, but it will take longer to set up. With a high-interest savings account, you might need to borrow a large sum of money to be able to create enough cushion for an unexpected expense. The advantage to this option is that you have long-term protection for your emergency funds, while with a checking account, you only have a short-term solution if your expenses go above a certain amount. The tax refund will probably get there before you even run out of your savings.
Some people choose to use a combination of the three options. They set up a checking account, a savings account, and a credit card with a high-interest rate to act as their safety net. They may save enough money from their checking account to allow them to pay off their bills and buy necessities when an emergency arises. If something else goes wrong, they have extra cash to fall back on.
2. Find ways to cut spending
You can always find ways to cut spending when it comes to your finances. When it comes to cell phones, can you just use your current plan? Are you paying thousands of dollars every month on cell phone, Internet, and television services? Can all these be reduced, trimmed, eliminated or combined? You can have extra payments or subscriptions you never use but never pay for. You can practice energy efficiency in your home in order to lower your Con-Ed utility bill.
A common savings tip is to set a budget and stick to it. A budget saves you time and money and helps you understand your financial goal better. It gives you a sense of control over your spending and lets you know if your finances are getting out of line. If so, you can adjust the budget to add or reduce the non-essential services that are costing you money.
The majority of Americans are not prepared for a major financial crisis. Most people are living paycheck to paycheck and do not take the time to budget. There are many people who use credit cards to purchase items they don’t need and pay high interest rates. With rising gas prices and a weak economy, many people feel like they are in survival mode and do not have extra income to save. This has created an opportunity for consumers to re-evaluate their budgeting skills and learn how to create a plan for savings and reduce spending.
While the recession is creating hardships for many people, it is also a time to get proactive and make budget cuts to save money and increase income. You cannot continue to spend money that you don’t have. If you want to spend less on entertainment costs, invest in your family by teaching them budgeting techniques at home. Educating children about spending habits early will help them grow up with good spending habits and help create wiggle room in future years.
The best way to begin saving money is to analyze where all of your expenses are and compare them to your income. Then determine how much of your income can be dedicated to saving. Many people have a hard time saving money because they spend more than they make. Be honest with yourself. If you don’t earn enough, then cut your expenses and spend less. It is effortless to build a cushion for the unexpected expense when you have planned for them in advance.
3. When to use an emergency fund
The Right Situation to Use an Emergency Fund – As the term suggests, the definition of an emergency fund is quite relative. This fund should only be used when an emergency has arisen and all other alternatives have been exhausted. When taking out this type of fund, it should also be ensured that the funds are enough to cover short-term expenses such as rent or electricity. It is important to the money will be available only to cover such expenses, and nothing more.
Where to Put the Emergency Funds – There are various places from which you can access your emergency funds. Some people opt for putting their fund in a checking account. Others prefer to invest it in high-risk mutual funds, bonds or stock portfolios. Yet others keep their fund in a savings account. When deciding on where to put your emergency fund, it is important to consider the interest rates and other charges you may encounter with your chosen option. The fees can eat up much of the interest that you are getting on your emergency fund.
How Much Cash to Access – When you decide on how much money you want to access from your fund, you also need to choose how fast you want to get the cash. If you access the fund over a long period, you can make huge returns. However, if you access the funds quickly, you would have to sacrifice high returns in exchange for rapid access. Usually, it would take years before you would really realize the profits from your emergency fund investments. Therefore, you should choose your fund investments wisely.
The Timing of Access – Most investors prefer to access their emergency fund when they expect it will be needed most. Therefore, you should set aside a portion of your monthly income or take out small loans from your bank. In this way, you can easily liquidate the funds once you need them. Of course, you should also remember not to access the funds early. This is because liquidating the fund early can negatively affect your credit score.