What is an Emergency Fund and Why Do You Need One?

It takes a minuscule amount of money to start and maintain an emergency fund. Everyone should have one, as it is useful in the direst of situations. Without an alternative place to pull money from, you’ll stress your savings or other related accounts.

emergency funds

The Specifics of An Emergency Fund

An emergency fund is an account where small amount of funds are set aside for life changing situations. This is separate from your savings account, and is meant to accrue a much smaller amount over a shorter period of time. With this fund, you gain additional security without affecting the long-term benefits of a savings account. The amount needed for an emergency fund is so small that you will not notice it being taken out of your check. It makes a major difference when the time comes to use the money for something important.

How Investing Helps

Credit cards have interest rates, and savings accounts can’t collect interest when money keeps moving. An emergency fund is meant to be used for large or small amounts. There are no consequences when pulling money out of an emergency fund. Investing in this type of account is smart, and it can grow or shrink based on your personal preference. At minimum, you want your emergency fund to grow enough to cover three months of expenses. The money doesn’t have to be deposited all at once, so set an amount, and slowly grow it until the goal is met. You can even set it up to pull a specified amount from your current account.

Types of Emergencies

Car repair, healthcare and divorce are some of the emergencies that require special funding. For a car repair, there is no guarantee that insurance will cover all the damages. With a healthcare emergency, bills pile up in a matter of hours. Not having the money to get treatment can put you in a life or death situation. A sudden divorce can put all the finances in jeopardy, especially if your significant other drains the main accounts. It’s unfortunate, but an emergency fund will keep you afloat until a lawyer or judge makes corrections.

Things to Avoid

Don’t take a large chunk of your current finances and dedicate it to an emergency fund. Doing so will just force you to divert the funds in situations that don’t qualify as emergencies. Try to keep the amount you transfer low, that way an emergency isn’t ‘created’ while beefing up your new emergency fund. And just like a savings account, the fund is meant to be used for its specific purpose. An emergency fund is not meant to be used for day to day wants or needs.

Wrap Up

If you can handle a regular checking account, then an emergency fund will be a piece of cake. Think of it as the one investment that always gives out positive dividends. Even if you don’t use it, an emergency fund will be there to protect you from the world.

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