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How to Build an Emergency Fund

No matter how often people are told to build up an emergency fund for themselves, it's not always easy to take the necessary steps when you feel as though you're living from paycheck to paycheck. But unfortunately, these emergencies are often what land you in a cycle of borrowing that can ultimately damage a credit score. For an easier time, keep the following advice in mind before you start setting money aside. 

Understanding the Basics 

From a broken transmission to a serious illness, emergency funds are the cushion you need to handle major unplanned bills. Experts recommend sticking to basic savings accounts for these funds to keep the money readily accessible and not tied up in investments or property. While these accounts may not bear the most interest, they don't penalize the holder for taking money out when they need it the most. True emergencies are those that threaten either your health, livelihood, or assets. For example, you need a functional car to get work on time, or you may lose your home if you don't pay off a debt. 

Setting Money Aside 

If you haven't already built up an emergency fund, it may be time to start looking at areas where you can cut out unnecessary expenses. Even low-income households may waste up to 10% of their income every month, which could be put away with a little planning. While it's frustrating to be told to cut back when you already feel as though you're allocating every dollar to expenses, it is possible to do. For example, you may want to devote a few nights to bean-and-rice dinners to stretch your food budget a little more, or you may want to use public transportation if your city has a reliable system. Experts recommend setting the money aside as soon as you receive your paycheck, preferably through automatic bill paying. When it comes to money, the old adage of 'out of sight, out of mind' is one of the most important philosophies when it comes to saving. 

Establishing Goals 

It's up to each individual person to establish their financial goals, but it may help to talk to a financial advisor about what it really takes to have an emergency fund that you can count on and get a concrete dollar amount as a goal. An advisor can work with you to figure out how to set money aside without compromising the rest of your financial obligations and long-term plans. The ultimate goal of an emergency fund should be to help you relax if there's an emergency in the future. Removing the element of uncertainty about how finances will be covered can make it much easier to breathe easy during unfortunate circumstances. 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.