Building an Emergency Fund
You can’t always predict when an emergency will occur, but you can take steps to prepare yourself.
The first step is building an emergency fund. According to a 2011 survey by the National Foundation for Credit Counseling, 64 percent of Americans don’t have enough cash to handle a $1,000 emergency. Regardless of your financial standing, there are many ways and reasons for building an emergency fund.
To put it simply, having an emergency fund will provide you both financial and mental security through unexpected events. Examples include: automobile trouble, unexpected medical bills, legal matters, and even unanticipated bills. It’s not something typically used for a vacation or to buy groceries, but more as a security blanket for unanticipated situations.
Because an emergency fund is typically separate from your day-to-day spending accounts, you won’t even realize the money is there. If a disaster were to occur, you can access the money and alleviate any feelings of worry or stress that you may have had.
The reason why many people fail to build an emergency fund is because they don’t believe their monthly income is big enough to split up. The beauty of an emergency fund is that it isn’t something that appears right away — you must build it. Depositing small amounts out of your paycheck each month is one way to build an emergency fund that doesn’t require a huge financial sacrifice. If you continue to add to it, the account will grow larger than you would expect. Plus, you’re not inconveniencing yourself every month, either.
While there are no guidelines as to what you can and cannot spend your emergency fund on, we suggest that you use it wisely. Consider whether your financial situation is truly an emergency, and whether there are other options.