Emergency funds are probably the most important thing you can have available. An emergency must be created after a budget since one must know how much money is left over for saving after all spending is known. Emergency funds are important for financial security, because they give you money to fall back on in times of need. Think how many times in the past year you have needed some money for some sort of emergency. Medical bills, flat tire on your car, pet was ill, and many more emergency money situations are happening frequently enough that this fund is a necessity.
As we already covered, a budget should be completed first. Next, we need to get started on the emergency fund. Before spending your money on going out to dinner or buying a big screen TV with the money you have left over each month, get started putting as much as you can into this fund. A good rule of thumb is to save at least three to six months of living expenses. Medical bills are at an all time high, and you would need plenty of money to survive if you needed to find a new job. You should calculate around how long it would take for you to find a new job if yours was lost, and then fund the account with a month or two more than what you could expect. After using money from this fund, be sure to put the money back when the cash becomes available. It’s a good idea to keep tabs on how much is in this fund, and if more should be added if your living expenses increase.
Now we will cover where this money should be kept. The emergency savings should never be in your actual savings account. Your savings account should be held separate so that you don't dig into your emergency fund when your going on vacation, or any other non-emergency situations. Its a good idea to keep the money far from your mind so you don't use any of it unless needed. A high interest savings account is a good place to keep the emergency fund. It might be a good idea to use a quarter of the money in CDs, Certificate of Deposits, which usually yield a higher rate of return than a savings account. An ING Savings account is a great example of a high interest account, and this company also has other various services: CDs, Checking Accounts, Mutual Funds, etc. Accounts that are FDIC insured are equally important since this insures that your money will not decrease or be lost if the bank goes bankrupt. Most banks are FDIC insured up to $100,000 per account, but it would be a good idea to check so you know your money is safe.
It is very important when looking to achieve financial freedom and positive cash flow to build a strong emergency fund. These will protect you from going deeper into debt in times of need.
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