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Emergency Fund - Why You Need One
Emergencies happen, and more often than not they are costly. If you aren’t prepared for an emergency then the cost of it can put you in serious financial trouble. If you were keeping up with your debts before but suddenly you can’t work how are you going to pay them? If your boiler breaks down in the middle of winter can you fix it? Often people don’t prepare for emergencies, so when they happen people have to over extend themselves on credit.
If knock on effects from dealing with an emergency were what started your financial troubles in the first place, post-bankruptcy you should think about starting an emergency fund.
What is an emergency fund?
An emergency fund is money saved in an accessible account that you only access in an emergency. High interest savings accounts are often a good choice. This is money you never touch unless it is a real emergency. What constitutes an emergency varies from person to person, but if you don’t NEED it, it probably isn’t an emergency.
Why should you start an emergency fund?
Emergencies are unpredictable and they can happen to anyone. Here are some things that could easily happen to you tomorrow, and without an emergency fund they could put you into some serious financial trouble.
- Job Loss
- Natural Disaster
- Death and funeral costs
- Broken boiler in the winter
- Fire/flood at home
- Hit and run on your car
How do I start?
Starting an emergency fund is simple. Open a separate no fee savings account and put a set amount in your budget to go into your fund every time you get paid. You can start small if you need to, after all saving something is better than saving nothing. As you get comfortable with your budgeting, pay off debts and decrease your spending you might be able to increase the amount going to your emergency fund each month.
When do I stop?
How much you need in your emergency fund is a difficult question to answer. Some experts suggest a set amount like $3000, while others suggest 3-6 months worth of living expenses. In the end it really depends on your personal situation. You have to weigh your living costs, financial situation and the level of comfort you derive from knowing you have a buffer.
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