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7 Reasons Why You Need An Emergency Fund

checklistPeople have been wising up when it comes to their money. They know that having a stable job is not enough to make your finances secure. It is not the only way for you to stay out of debt. If you really want to protect your future from financial ruin, you should stash up on your emergency fund.

Before you can try to learn the emergency fund best practices, it is important that you try to understand why you are doing this in the first place. Sometimes, building up your savings will bring out all sorts of temptations to use it – especially when you see the amount growing in your bank account. To help battle these temptations so you can be kept from touching your emergency fund, you have remember the reasons why you want to build up this reserve money in the first place.

7 ways your reserve fund can help you

There are many reasons why building up your emergency cash fund is necessary. But among all of them, here are 7 ways that should encourage you to build it up.

  • Eliminates the need to borrow money. The most common reason to get an emergency fund is to keep you from using credit just to survive an emergency situation. You want to make sure that you have the money to finance these unexpected scenarios. That way, your usual budget does not have to be compromised.

  • Provides for you and your family even after a job loss. One of the reasons why people are so scared of a losing their jobs is because they are left without the resources to help provide their the needs of their family. When you have an emergency cash put aside, you do not have to worry about these things. You can concentrate on getting a job because you know that your family has the means to survive in the meantime.

  • Removes the hesitation to spend on medical related expenses. As important as our health may be, some people actually forego getting medical treatment just because their finances are not enough. You do not want to make this difficult decision especially when it involves someone that you love. If you do not have the savings for this, you could end up letting your health deteriorate or put yourself under so much debt for it.

  • Keeps you from taking money from your 401(k). The retirement fund that you are putting aside for the future is your money – you technically, you have every right to use it. This is why some people dip their fingers in their retirement money when they are in financial need. But when you think about it, you don’t really have to reach a point wherein you have to use the money you had been saving for the future. You can save up for these unexpected scenarios so your retirement fund remains intact.

  • Gives you the ability to invest your money. By building up your savings, you get to put aside money for possible investments in the future. Sometimes, an opportunity comes that you just have to grab. When you have some money in your savings account, you can grab these rewarding opportunities to grow your money.

  • Protects relationships from ruin. A lot of marital issues stem from financial problems. If you want to make sure that your marriage, or even partnership, will not be ruined, an emergency fund may be able to help with that. It will keep both of you from blaming each other for being forced to cut back on your expenses.

  • Makes a stress free living possible for you. Lastly, and probably the most important reason for you to build up your emergency fund is for your own peace of mind. Having this fund will keep you from worrying about the unexpected because you are financially secure.

Remember these reasons as you start building up your emergency fund. This will help keep you from straying from your saving goal.

Computing how much is needed for your emergency cash fund

Once you understand why you need this fund, you may want to consider how much money you need to put aside. This really depends on the type of lifestyle that you are leading. You can use online calculators like those from PracticalMoneySkills.com or Calcxml.com to help give you an estimate. But for a more accurate target amount, you may want to follow these steps.

  1. Look at your current budget. Identify the expenses that you need right now and anticipate what you will need in the future.

  2. Make two categories for your expenses. You want to segregate the necessities from the luxury for future reference.

  3. Take the total amount of both your wants and needs.

  4. Choose how long you want to be able to survive on your emergency fund. The average unemployment period is at 9 months so that means you may want to target this amount. You multiply the total amount from step 3 and you multiply it by 9. If you will feel more secure with a 12 month emergency fund, then multiply it by 12. This will be your target emergency fund.

As you are building up your funds, you need to make sure that you are constantly checking if the expenses that you based it from will be enough. Sometimes, we think that we have enough but inflation could make our funds fall short.

In case you have to use your emergency fund, estimate how long you may have to rely on it. If you think it will be for a long time because the financial crisis seems to be nationwide, then consider spending only on your necessities. Live on a frugal budget so your 9 month emergency fund can be stretched even longer. This is how you really ensure your financial security.

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