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What is emergency fund? Why is such a fund needed? How can I save money for emergency? And, most important question, Do I need an emergency fund?
Let us try to find answers to all these questions.
Why Home Owners Need Emergency Home Repair Fund
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Ever since we became homeowners we felt the homeowners pinch. before moving in we had to make a few repair and improvements as per the suggestions from the inspector. we installed hurricane shutters at the main door, we replaced one door due to termite infestation. Within a year we had a leak and spent $2500 for the roof repair. As of writing this story we detected moist carpet in my office room.
The constant work like these go on, our home is 1992 built and this is the time we expect to pick up few repair bills. I was thinking about some good ways to handle increasing amount of bills towards our home repair. Then I read about home repair fund.
When you Urgently Need a Large Amount of Money
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Earlier I posted methods of earning quick cash legally. In this article let’s talk about a situation where all of a sudden you have a need for huge amount of cash, the situation we term as a financial emergency. And let’s say you don’t have an emergency fund built up. How can you quickly arrange for that large amount of money? This is not about making money, it’s about arranging the money for the emergency need to pay off later.
You don’t have it available in your bank account, and you really need to get your hands on this money in a short period of time. What are your options? From my point of view, you actually have three or four solid options at your disposal. Chances are, one of these options will work for you so take a deep breath and try to tone down your panicked state.
Creating Emergency Fund with Low Income
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An emergency fund is one of the pillars of personal finance. Having a sizeable emergency fund might secure your financial future and safeguard against financial crisis. Emergency fund shields you from borrowing money at a high interest. For example, a $10,000 unforeseen medical expense, if paid with a borrowed money, will require you to pay almost $20,000 over the years, including interest charges. That’s a lot of money. If you have $10,000 saved in an emergency fund, you can pay without borrowing the money.
One big problem is people understand the benefits of having an emergency fund but to actually build one when you’re barely scraping by seems like a daydream. Building emergency fund from scratch is a hard task. Let us talk about a few tricks on budgeting your money to actually build an emergency fund without having a big income.
Why it is hard to create an emergency fund with a low-income
When you are barely saving or rather, surviving paycheck to paycheck. Saving a part of your income is a dream, a near impossible ask. If you set a target of saving $300 a month, there will be some months where you’ll actually have to draw money from the saving kitty, let alone contributing $300 in that month. Our expenses vary due to unforeseen events.
Building An Emergency Fund From Scratch
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Earlier I wrote about the myth of emergency fund. For some reason, I didn’t get much good feedback about it, neither it received a good amount of views. But the topic is important. An emergency fund is a must for good financial health. In this post, I’ll simplify emergency fund, by just focusing on the setting up of the fund. Let’s assume you don’t have anything for an emergency fund right now. Let’s set up one, right now. We all need it!
Infographic provided by Lendgreen
Solving Emergency Fund Myth – What, Why and How Much
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What really is emergency fund? Why such a fund is needed? How can I fund it? And, most important question, how much money I should keep in emergency/contingency fund? Let me try to find answers to all those questions.
I always had 40,000+ in my Checking and Savings account at any given time in last 5 years. I felt that’s absolutely minimum. I read prominent personal finance expert Suze Orman’s advice at Oprah’s web site. He first advice was to have 8 month’s worth of expenses saved in emergency fund. So, I thought that’s normal. Now we are a hoe owner and all those cash cushion went in to pay for down payment, closing and home repair cost. We now have around $5,000 lying in a saving bank account.
As they say, buying home prompts home owners to become financially more prudent, I started reading about emergency fund and started listening to podcast, right after paying our mortgage down payment.
Things To Consider Before Creating Emergency Fund
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You must know what, why and how of an emergency fund. You definitely need to have that liquid cash readily accessible for you needs like a sudden health issue or loss of a job or even unexpected expenses. That liquid cash is something that you will need to consciously build before you start putting money into some of the best investments that you have planned for the retirement.
Size of the fund and the peace of mind
The size of the emergency fund is something that you will need to define for yourself. Typically this fund should be equal to 3 to 6 months of income however, I do not think that is a fair calculation. The emergency fund should be based on some hard cold facts, like your monthly expenses. That you will be able to arrive at only if you have a budget and you know how much goes out each month.
If you are not budgeting, I would suggest that you start doing it right away else there is no way you will build an accurate corpus of an emergency fund and I am sure that there is no way for you to know that you are over spending or under spending.