Setting up an emergency fund to have ready for those rainy days is one of the most important things you should do when becoming free of debt.
What’s The Purpose Of An Emergency Fund?
Things always happen unexpectedly and those unexpected things can usually lead to an expedited sum that needs to be paid. Your car can break down, plumbing could need fixing, an overseas emergency trip may be required and other circumstances can put a burden on your shoulders if you do not own an Emergency Fund. This could even lead to more debt.
Being in possession of an Emergency Fund will help you get over these circumstances like it was nothing. It also reduces your financial stress because you have something you can lean on in case something unexpected does occur.
How Much Should I have Inside My Emergency Fund?
Set your fund with anywhere between $500 and $1500 in a separate account which will be useful in case of a real emergency. Put money aside when you feel comfortable to add on to this fund which will give you a bigger safety blanket down the road.
When This Should Be Used
To control this fund in the correct way, it requires mature financial decisions. Establish what a “real emergency” is to you. For example spending emergency funds on a suit that goes on sale isn’t idealistic for this type of fund. However if your car transmission breaks down, that can be seen more of an emergency and is something those funds can be directed towards.
How To Keep A Healthy Emergency Fund Balance
If you have no choice but to use your Emergency Fund then you must replace the amount spent at your earliest convenience. You can do that by redirecting some of the money you set aside for your financial goals (in your budget) and replenish it with the full amount.
Why Should I Do This?
Doing this will relieve you from the unexpected and will give you a control on your financial life. It will also be relieving you from stress and showing you that you are on the right step to living a debt free life is all that comes with building an Emergency Fund.
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