Keeping your personal finance in order is not something that is an easy task. Personal finance disasters can sneak up on you. Sometimes an emergency expense can mess up your budget so badly that you have to take months to get things back in order.
To help prevent emergency expenses or other unexpected situations from blowing your personal finance out of order you need to develop something called an emergency fund. An emergency fund is basically a savings that is used only in case of emergencies.
Importance of an Emergency Fund
The idea of an emergency fund is basically to help prepare you for extreme situations such as the loss of a job. An emergency fund should ideally be something you could live off of for at least three months if you were to suddenly lose your income.
However, an emergency fund can also be something you can dip into should you have an unexpected expense. The whole point is that you have this extra money there if you should need it for something important that does not fit into the budget.
An emergency fund is not a savings account you can use to make special purchases. It is important to understand and maintain that the emergency account is only for emergency situations.
Make a Budget
To start setting up your emergency fund you need to establish a budget. This will help you to learn about your expenses and be able to set up the amount of the emergency fund.
A budget will also help you when it comes to deciding how much money to put in the fund every month. Be honest with your budget.
Find Out How Much You Need
You will want to consult your budget for how much you will need in an emergency fund. You want to make sure that the fund’s total amount would allow you to live for at least three months.
Of course you can feel free to save above that amount, but shooting for a goal of three month’s living expenses is a good place to start. Always remember, too, that when you take any money out of the account that you need to put that amount back.
When deciding you may want to consider extra expenses and if you want to include those in your emergency fund. If you fall on tough times you may end up deciding to forego extra expenses like cable television or weekly night out. Or you may still want to keep those things. Just make sure you come to an honest amount that you could really off of if you needed to.