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Why You Need an Emergency Fund and How to Build One

Finance

An emergency can take many forms: natural disasters, accidents, sickness and death. Nobody can predict what will happen when, but you can be sure that something will happen at one point or another. In other words, you need to be ready for hell and high water, almost literally. It’s true that many go through life either without encountering obstacles or, paraphrasing Blanche Dubois, simply depending on the kindness of strangers. However, this is not something you’d want to leave to chance or in the hands of others. When it comes to an emergency fund, it’s always better to have it and not use it, than needing it and not having it.

When to start an emergency fund             

The short answer would be as soon as possible. Nevertheless, you should ideally take care all of the essentials needs of your family and yourself first. After those needs (food, shelter, clothing, etc.) then you can go ahead and start building your emergency fund. You need to take into account that this is unlike saving to buy something you want. The fund must be there at all times; thus, you might want to define what an emergency is so you won’t spend it all at the first setback. All things considered, this fund should be the last resort, to use only where all other options have been exhausted.

How to build your emergency fund

An instance of an emergency is a fire. If your house burned down you would need a sum of cash to start over. Then again, if you keep your emergency fund under the mattress, it would be safe to assume that it would be gone as well. Therefore, the first step is to open a savings account, preferably a different account from the one you use for daily transactions and whatnot; that way it will not get mixed up and spent on a purpose that it wasn’t meant for. Once that’s taken care off, don’t feel the need to transfer all your money to that new account; you can easily start with a small figure and build from there. From then on what you deposit in your emergency fund account should be according to your income; remember that a little can go a long way.

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From Theory To Practice     

So what if an emergency does take place? You’ve already made sure that your money is safe in the bank, but you also want to have easy and quick access to it; this should be discussed when opening your account. It is also important to manage that money well so as to make the most of it. It’s true that during an emergency normal rules don’t usually apply, but you need to find a measure of control and order. It might be useful to learn how to devise a budget to better distribute your emergency fund if the situation ever arises.

As a final piece of advice, keep in mind never to gamble with this money, not even in the stock market, the point of this fund is that it has to grow (a savings account alone will grant you interest), never decrease.

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