An emergency fund has two purposes. Its primary purse is to carry you through the times of financial strife such as when you’re unemployed or facing financial emergencies in terms of medical expenses etc. The second purpose is to provide you with a source of cash which you can use when the emergency need arrives instead of using your credit card and getting yourself under debt. So the two primary purpose of an emergency fund is to provide you with cash during emergency needs and to help you avoid debt.
The first step in building an emergency fund is to decide how much you want to build up. You may decide that you have on to have an emergency fund that covers three months to 12 months of living expenditure. If your living expenditure is in thousand dollars a month then you might want to build emergency fund ranging from $30,000-$120,000. You can start slow and building a fund for three months and then extend it to 12 months or more.
The next thing you need to calculate is how much you can afford to put away as saving for an emergency fund every month. The money that you put away for an emergency fund has to come from your discretionary income which means the income that is left over after you have made necessary expenses and paid taxes.
You should open a separate savings or checking is account for your emergency fund. You should keep separate from your account so that you not tempted to use the money you put into it for general expenses. You should also not use the emergency fund for buying things that you may want such as a vacation or luxury furniture. An emergency fund is truly meant to be used in emergencies only.
Start building emergency fund were putting money aside every month they pay cycle till you have achieved your goal. It helps to save money automatically via direct deposit or automatic transfer.
You can use your emergency fund in emergency situations. Some examples of an emergency situations are as follows:
when you lose your job and need to cover the mortgage and other expenses.
You have unexpected medical bills not covered by insurance.
Your lender calls your car loan due and will repossess your vehicle if you don’t don’t pay immediately.