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Financial Literacy - Emergency fund
OVERVIEW
Preparing for all contingencies
Unless you like living in crisis mode, it's essential to have an emergency fund. Learn basic strategies for building reserves.
Creating an emergency fund

Why do you need an emergency fund?

Even in the presence of debt, contributing to an emergency savings account takes top priority, but not at the exclusion of working toward other goals. "It's the habit of regular saving that has to be instilled, even if it's $25," says McBride. "The money you get from trimming expenses or working a second job can be used for aggressively paying down credit card debt."

Follow these steps:
1. Establish the habit of saving through direct deposit to a savings account, and at the same time sign up for the company 401(k) plan.
2. Tighten your budget to pay down credit card debt. Use the budget work sheet.
3. Use Bankrate's debt pay-down calculator to get debt off your balance sheet.
4. Figure out how quickly you can amass your emergency fund.
5. See how your savings can grow.

A benefit of working toward multiple goals simultaneously is that if you're building savings while paying down credit cards, you have some savings in place that should absorb an unexpected expense. This reinforces the need to have that savings and doesn't negate your debt repayment efforts.

For handling the larger expected bills looming on the horizon -- say, property taxes -- you have a few equally good choices, says McBride.

Select the plan you prefer:

  • Include extra savings to your emergency savings account.
  • Create a separate side savings account with the express purpose of meeting your tax bill.
  • Incorporate the added savings into your regular monthly budget so that while you may only pay taxes or insurance once a year, you are effectively breaking the bill into 12 smaller chunks.

Where the money lives is up to you. Whether you keep it in a checking account so you can just write a check when the bill comes due or move the money to a high yield account for the interim, the discipline is to set that money aside so it's there when you need it.

"In the end," says McBride, "there's no substitute for good, old-fashioned discipline. That emergency savings account isn't something to tap for pizza on Friday night."

-- Posted: July 23, 2007
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