Setting up an emergency fund is one of the best financial moves you can make. If you tend to live paycheck to paycheck, having money set aside for emergencies is a must. If anything happens that requires immediate cash, you will have this money to use. Without this fund, you will have to scurry around looking for a way to get cash fast. Here are three tips to help you set up an emergency fund to protect your finances.
Understand the Key Principles of an Emergency Fund
An emergency fund is an account you should have for unexpected expenses. If you have one set up, you will not have to panic if:
- Your car breaks down
- You miss a week of work due to sickness or an injury
- A huge medical bill occurs for one of your family members
- Your furnace stops working
- A tree falls on your house
If anything happens that requires immediate cash, you will not have to worry because you will have money in your emergency fund to use for the bill.
The first principle of an emergency fund is that you must only use it if you truly need it. It is not a fund set up for your Christmas shopping or night out on the town; it is strictly for true emergencies.
The second principle is that your emergency fund should be in a location that is easy to access, such as a savings account. If you need the money for an unexpected bill, you will need to be able to get the money out right away.
The third key principle is that ideally, it should contain three to six months of your income. If your income is $2,500 per month, you should aim for at it having at least $7,500 in it.
Steps to Set One Up
Setting up an emergency fund is not hard to do, but getting a sufficient amount of money in it can take time. To make this easier, you can try following these tips:
- Start low – If you are thinking that it will be impossible for you to save three months of your income for this fund, then start lower than this. Start by aiming to get $100 of money in the fund. Once you do this, aim for $500. If you gradually build it up, it will be easier and less stressful for you.
- Do it little by little – You do not have to wait to open up your fund until you have the full amount. Instead, open up a saving account with a small amount and gradually add to it. Deposit $10 or $25 each week (or with each paycheck), and let it grow.
By following these two tips, it will not take long for the account to begin growing, and seeing it grow may give you an incentive to keep adding to it.
Tips for Keeping It Replenished
The final thing to know about an emergency fund is that you will need to keep it replenished. If you have to use some or all of the money from it for a bill, begin a plan right away to begin building it again. You can use the same principles for this as you used to create the fund, and by doing this you will always have money when you need it.
If you suspect that you will have a major repair expense within the next few months, you could always start adding to the fund before you encounter the problem. This will help you avoid using all the money in the account when you have to pay for the bill.
It can be hard to set up an emergency fund and keep it replenished, but it will help you avoid running into financial problems. If you do not yet have an emergency fund set up and encounter the need for fast cash, you could always apply for payday loans from a place like 1st Choice Money Center. These are easy to get, and you will be able to get cash fast once you apply.