What is an emergency fund and why do I need one?

Unfortunately, things sometimes happen in our lives that are beyond our control. An unexpected illness of you or your spouse, loss of a job or being involved in an accident may prevent money from coming in for a while. However, you still need to buy groceries, pay a mortgage or car note, in essence—be able to survive.

Making the decision to establish an emergency fund a priority is one of the most important things that you can do for your financial future. Having money set aside to fall back on, should the need arise could save you from defaulting on your mortgage or losing your car. Worst yet, if you are forced to live on credit cards, you may be paying for groceries or fuel for many years to come at whopping eighteen percent interest.

• Figure out how much you need to save. Many experts agree having six to nine month's worth of salary that can be readily accessible in an emergency is advisable.
• Keep that fund separate from all other accounts. It may even be a good idea to keep it in a separate bank, clear across town without access by any means such as a debit card. The less convenient it is to access, the more likely it will remain unused.
• Never use the money that you are saving in the emergency fund for non-emergencies. Utilizing the money that you have saved for things like a new television, a vacation, or anything that is non-essential is self-defeating.

• Start slowly if you do not have much money to spare. Begin by saving five, ten or fifteen dollars a week. Starting off small is better than not at all.

• Have it automatically deducted from your payroll check. Talk with the personnel office at work and arrange to have it directly deposited into that account. Not even having to think about it makes it easy to save.

• Eliminate a service. Cancel all magazine subscriptions that are not free, or that extended cable contract and watch local channels. Place the extra money into the fund.

• Separate spending money from saving right away. When you receive your paycheck, deposit only the money that you will need in to your checking account until the next payday. Place the remaining money into your emergency fund.

There are various type of savings accounts in which you could establish your emergency fund account:

• Regular Savings Account - These types of accounts draw very little interest over time;
• Money Market Account - Money Market Accounts (different from Money Market Funds), typically earn higher interest than regular savings accounts.
• Certificate of Deposit - Certificates of Deposits (CDs), draw more interest than both of the previously mentioned accounts. However, a minimum amount of deposit may be required.

Place the money in an account where you are able to draw the most interest.