The Importance of Emergency Funds

Emergency funds are a necessity for anyone who desires financial security. Not only can it provide you with financial resources that you can resort to and depend on in times of need, it is a big weight off of your shoulders when it comes to wondering what you'll do if Jimmy's teeth don't come in right or Sarah falls and hurts her leg. What if your car breaks down? Will you just rack up more debt? Debt might take years to pay off, and it will only cost more in the long run due to high interest rates.

However, all of that unnecessary stress can be avoided by depositing an extra $30-$50 a month into an individual emergency savings account. When doing this, it's best to think of the emergency account as an additional monthly bill, to ensure that you're actually depositing money regularly. The emergency savings fund would ideally be at least three months of your regular living costs, in case you lose your job or have to take time off due to any number of factors.

But what's most important about your emergency fund is that you steadily add to it, and only take money out in case of actual emergencies. Unlike investments, the success of your long-term savings fund doesn't count on return or interest, but rather on placing a fixed amount away steadily and consistently so as to have immediate access to it whenever the need arises.

Despite what your financial status may be, the first step to the construction of an emergency fund is knowing where your money is currently being spent. Once you've set out and analyzed your budget, it's easier to consider cutbacks or excess savings and trim down expenses.

Emergency funds can be stored in checking or savings accounts, money market accounts, or certificates of deposit for quick access, but you should be sure that you aren't combining your emergency funds with any other savings you may have, so the two don't blur together. You don't want to risk forgetting which funds should be set aside and accidentally spend them!