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What is an emergency fund and do you need one?

July is savings month.

What is the one thing you can do to make your financial life better?

What is one improvement you can make to get your savings going?

The best thing everyone can do is start an emergency savings fund.

What is an emergency savings fund?

An emergency fund is the fund that you put aside and keep for real emergencies, like medical emergencies or you wipe out a tyre in a pothole and you need to get to work the next morning, etc. These type of things are considered to be emergencies.

If you get invited to a night out on Friday and you are low on cash, that’s not an emergency.

What is the purpose of an emergency fund? Why would someone want to start one?

The main purpose of an emergency fund is that you have cash on hand, and you don’t have to take a loan, or borrow money from someone.

If you use your credit card, you can put the money straight back into the card the next day from the emergency fund. Your emergencies should not cost you interest, and interest is what kills people who borrow too much.

How to decide how much to put into an emergency fund

This is always difficult because it is different for each person or family.

If you are you single, then you are catering just for yourself.

Consider how many kids you have, or if you have someone who is sickly, the age of your car, and how much you earn.

Work out roughly how much you will need to cover some of the common emergencies.  It doesn’t have to be a huge amount.

Where should people keep the money that is saved in the emergency fund?

Keep your emergency fund in a separate account. Always make sure it is in a separate account because if it gets mixed in with the money for the rest of the month, it could get used by mistake.

The best way is to put a stop order on the account that your salary gets paid into. Then, when you get paid, the money is automatically transferred. There is no chance of it being used accidentally, and when you have enough in the emergency fund, you cancel the stop order at the bank.

So, if you are thinking of starting an emergency fund, remember:

  • Decide how much you need in your situation
  • Decide who controls the account, then
  • Open a new account and send the money to your new account with a stop order.

Doing this will prepare you financially for any small emergencies that cross your path. This will also reduce your stress because you don’t worry about small unexpected expenses

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