Thursday, April 26, 2007

Emergency Fund

Setting up an emergency fund should be a top priority for anyone trying to take control of their finances. An emergency fund, also known as a rainy day fund, is a pool of money that is set aside to be available for unseen expenses or to help you through extraordinary situations. The fund will be there for you to use should something happen that requires money that isn’t in your budget and can provide the cushion needed for any number of issues.

One of the main reasons to have money set aside is to provide living expenses if you loose your job. This is why many people recommend having 3 to 6 months worth of expenses saved up so you can live off the money and search for a job. There are many other reasons to have this type of fund available for example if you have a car accident or medical problem this money can be used to help cover those expenses and keep you out of debt.

It is important to keep this money in a safe place where there is little or no chance of loosing the principal. One very good option has become available with the continued technological advances of the internet. There are now many banks that have high interest paying online accounts many paying 5% interest or higher. If this option is chosen make sure that the account is FDIC insured so if the bank goes bankrupt the government will insure the money in the bank.

Once you have gotten accustomed to putting some money into this account every month it can also be used to provide money for larger expenses instead of using a credit card. I have used some money set away in this manner to pay for a small vacation and other larger expenses that are not part of my ordinary budget. However, I would not recommend doing this on a regular basis for you will deplete the fund. I always keep at least 3 months of expenses saved in case of emergency.

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