Importance of an Emergency Fund and Ways to Fund It

by Steven on November 9, 2011

An emergency fund is necessary for obvious reasons. Unexpected circumstances include job loss, car breakdown, sick kid, and natural disaster. You can build an emergency account using one or more of the following principles:

If you invest in your company’s 401K or other pension plan you may be able to take out money later with little to no penalty in some cases. Depending upon the retirement plan you participate in, provisions are often made for emergencies.¬†

Certain life insurance plans and other insurance policies make provision for an additional benefit. That often is a dividend paid back to you via company earnings.

Add money to this fund as often as possible. If you are not comfortable yet with putting away more than a few percent then start out with that. Even a dollar a paycheck is better than none at all. The recommended amount would be $25 to $50 per paycheck or more. That would provide you with over $1000 at the end of the year.

Cut down on items you do not need at least temporarily. For instance, if you are not much of a TV watcher anyway why do you need cable? Likewise, if you are not online much you can get rid of your Internet service.

Find a cheaper phone plan. This is one area where anyone could probably stand to save money. There really are cheaper plans out there, with the same great calling services.

Use at least a portion of your tax return. That will help boost your emergency fund savings goal.

If you already have an emergency fund do not brag about. Less people will hit you up for money and you will feel less obligated to give in to their pleading requests. (Besides, if your friends are your friends now they will be your friends whether you give them money or not.)

Try to make it a little more difficult to get access to your emergency funds than your regular funds. For instance, you might consider starting your second fund account at a back opposite to the side of town where you live.

Change the size of your emergency fund according to changes in life. For instance, you will most likely need more of a stash built up if you have a family and children.

Cut down on luxuries such as coffee, soda, and other expensive drinks. Either that or purchase them in bulk instead of the two-dollar bottles you normally buy.

Put your money away in a higher-yielding type of savings account such as a CD or mutual fund. However, try to have that fund as close to you as possible in case you unfortunately need it.

Get a temporary part time job. You could also market your skills and hobbies on the side. Besides, you never know when you can make your part time employment or part-time hobby into a full career. An additional benefit of course is that you will have the funds you need in case of certain types of unforeseen circumstances.

Even the smallest amount of emergency fund you set up can provide you with a greater peace of mind. Everyone wants to know that they can take care of themselves or their family. In addition to having a cash fund, one of the types of insurance that is recommended is homeowner’s (or renter’s), health, and car insurances. An adequate life insurance plan is also ideal so certain expenses are paid for after you pass away. If you seem overwhelmed when you read this, just take the process of saving for a rainy day one step at a time. Think about what you can do for yourself versus what you cannot do.

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