The Importance of an Emergency Fund

Having a stash of cash set by in a savings medium is the optimum way to cope with unforeseen emergencies which can threaten ones financial position. Lack of preparedness to cope with emergencies that require an immediate monetary infusion can leave one reliant on borrowing. However as credit markets have tightened, borrowing may not be a feasible option in prime markets, particularly if unemployment is the sudden emergency.

It is always recommended to have an emergency fund to cope with sudden expenses such as car repairs, medical costs, or a change of circumstances. However in a recessionary climate it cannot be underestimated how important it is to establish an emergency fund to cover the full cost of living expenses for a set period of time. Often three to six months is cited as a good measure but I would personally recommend a fund to cover annual expenses, which if not needed may be converted into long term savings.

Many people live pay check to pay check, not necessarily through being short of the wherewithal to make savings, but simply through lack of forward financial planning. Spending all of ones disposable income instead of making a conscious effort to pay oneself first via savings can have a devastating impact if a change of circumstances warrant the need of additional funds. There are many ways in which money is simply wasted and a solid review of ones finances can offer ways to cut back.

Those with credit options can utilize credit cards, cash in on home equity, or take bank loans, to cover emergency funding. However if the emergency is more than short lived these can all prove expensive options which can lead to debt when one is best able to cope with it.

Many are already maxed out on credit or are not deemed credit worthy, leaving options such as pay day loans, pawn brokers, home credit, auto title loans, sub prime credit cards, or loan sharks as the only choice. These options are all costly and if used by those on a fixed income can prove difficult to extricate oneself from, as interest payments accrue.

Thus the arguments in favor of establishing an emergency fund are strong. In order to initiate a saving plan it may be necessary to cut back in other areas or look for further income opportunities. An emergency fund needs to be accessible thus look for savings accounts that allow easy access whilst paying interest.

There are options available by utilizing fee free checking accounts that pay interest on the balance if one can be sure of not being tempted to make free with a credit balance. Always ensure that wherever you choose to save has FDIC coverage to guarantee your savings against bank failures.

One area where families and individuals can really benefit from an emergency fund is peace of mind. Knowing that funds are tucked aside to deal with unforeseen eventualities can give a sense of security which is priceless in comparison to constant worry.