Importance of an emergency fund
You know you need one, and you’ve probably talked about saving one, but most people never get around to saving one. When you’re starting your financial plan and budget it’s very important to have an emergency fund started. An emergency fund needs to be around $1000 for the average person. This money needs to be easily accessible in case of an emergency.
In other words don’t have your money tied up in CD’s, investment accounts, etc. This money should be in a savings account of some type. What can emergency funds be used for? Emergency funds are only to be used when all your other options have been exhausted and the item or service is an absolute necessity. Needing to have your hair and nails done for a party and not having any more money in your budget does not constitute and emergency. An example of an emergency would be the oil pan on your car getting busted and needing to be repaired immediately. The next month you should immediately start repairing your emergency fund and getting back to $1,000.
The reason you need an emergency fund is to keep you focused on your financial freedom goals. You must have an emergency fund when setting up a budget. Many times when trying to pay off debts an unexpected disaster will occur and there will be no money or funds to pay for the unexpected event. The only way you have to pay for it is with a credit card. This bashes your hope and everything you have worked so hard to accomplish is destroyed. You give up trying to pay off the debt and revert back to your old spending. You will forget all about sticking with your budget and you will get back in the same financial hole you were trying to crawl out of.
A small emergency fund set aside in an easy accessible account will solve all your problems. When you need that $300 unexpected car problem to be fixed you have the cash on hand. Just pay for it and then start paying back the emergency fund. You will be able to continue following your budget, you won’t have to go back into debt, and you can stay focused on your overall objective!