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We have all been advised at one time or another that it’s important to have an emergency fund. I prefer not to use the term “emergency” so I have a contingency fund that includes both cash and credit in the event I need it. The question is why have one and how to build it.
There are many reasons to have an emergency fund. Some include being able to cover unexpected expenses, unexpected income loss, and just plain being able to handle anything that may come your way. Because so many of us are living paycheck to paycheck, we tend to use credit when an emergency arises but having that back-up plan in place would allow you to avoid credit card debt. The good news is, it’s easier to build an emergency fund when you live minimally and simply.
The best ways to build your emergency/contingency fund are:
Step 1: Determine how much you need in your emergency fund. The amount varies but most experts recommend 4 – 7 months income set aside in an account that you will not touch for any reason. This means that you will NOT use this reserve for vacations, expensive clothes or dining out.
Step 2: Determine how you will build your emergency fund. The best way to do this is to take 10% off the top of your income BEFORE you pay your bills. In other words, pay yourself first. This sounds really scary, I know, but you and your family are just as important as all the bills you have to pay each month. Start by creating little goals such as saving $1000 then each time you get paid or earn income, you set aside 10% If you clear $500/weekly, take $50 right off the top and put it into a separate account that you will not touch for any reason.
Step 3: Determine where you will keep your emergency fund. This can be a tricky one. You will need to have your emergency fund accessible but not TOO accessible. A great option and often less expensive are online banks. You can quickly access your funds BUT you are not able to just walk into the bank and withdraw This gives you time to think about what you are planning on spending your money on.
Step 4: An emergency/contingency fund is just that – for emergencies. Tell yourself that you will NOT touch these funds for any other reason.
Step 5: Slow and steady wins the race. Yes you must save a portion of your income but do not do it by relying on your credit cards for day to day living expenses. Sit down and write up a realistic budget including your living expenses.
Living simply and minimally will help you not only build your emergency fund quickly, but also let you live a less stressful life.
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