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.

First Steps to Financial Success

The first golden rule of personal finance is to spend less then you make. As elementary as this may seem, there are many people who live paycheck to paycheck and can’t accomplish this goal. This is the important first step to breaking that paycheck to paycheck mentality. Spending less then you make is the basic building block to enable you to accomplish your goals weather it is building an emergency fund, saving up for a large purchase, or funding a retirement plan. All of these goals are started by spending less then you make so you can have money available to fund these plans.

A great way to start is to pay yourself first. I would recommend opening a new savings account, preferably with a higher interest rate, and putting a little money into that account with every paycheck you receive. If you continually do this you will get accustomed to living off a smaller amount and you won’t have the cash burning a hole in your pockets waiting to get spent. In addition to getting used to living on less money this will lead to creating a savings fund that can be used as an emergency fund or to save up for large purchases instead of using credit.

This is a way to help build wealth and if used the money you save will in turn make you additional money from interest. It will also help keep you out of the dangerous spiral of debt which so many people are getting sucked into these days. Spending less then you earn and paying yourself first are the first two steps toward financial success and independence.