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Emergency Fund: Do's and Don'ts

According to the Federal Reserve, in 2016, more than 40 percent of U.S. adults agreed they wouldn't be able to cover an emergency expense that exceeded $400.

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Yet at some point in our lives, many of us have to deal with an unexpected event that severely impacts our financial situation. It can be loss of a job, a last-minute home repair or even unexpected medical bills. For this reason, financial experts advise having an emergency fund: sufficient money to cover three to six months of expenses. Here are some quick do's and don'ts to get your emergency fund on track:

  • Do make a budget to see how much you need for a month. Before you start putting money aside, determine what your monthly costs are. Document all of your expenses, including housing, insurance, utilities, groceries, vehicle payments, cable or phone bills and any other miscellaneous costs. Consumer.gov provides a handy "Make a Budget" tool to help get you started.
  • Don't be unrealistic. It's crucial that you are honest with yourself when making your budget ─ even if you don't like what the numbers are telling you. You need a clear picture of your finances in order to know how much you need in your emergency fund.
  • Do calculate how much you can set aside each month. To build up your emergency fund, you'll need to set money aside each month. Evaluate, objectively, how much you can save after meeting all of your other financial commitments.
  • Don't use your regular checking or savings account. It's advisable to set up a separate account for your emergency fund and transfer a weekly or monthly sum into it automatically. This will ensure the fund keeps growing; plus, it will go a long way in preventing you from dipping into the savings unnecessarily.
  • Do replenish the fund if you have to use it. In the event that you have to dip into your emergency fund, replenish it as soon as possible. This will help you stay on track financially.
  • Don't use the emergency fund for expenses that don't qualify as emergencies. It's intended as a cushion in case you actually need it. When it comes to things you want as opposed to need, it's advisable to use cash that isn't reserved for anything else.

Unexpected expenses never come at a good time, but the truth is that they can happen. By having money set aside ahead of time, you can help prevent yourself from building up debt and getting into dire financial straits. Not to mention, by being prepared for unexpected setbacks, you'll most likely find life's occasional hiccups will cost you and your loved ones a great deal less stress when they do occur.


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