An emergency fund is a fund set side for unplanned expenses. This could be for an unexpected car repair, trip to the emergency room or doctor, air fare to attend a loved one’s funeral, or any other unforeseen expenses. These expenses usually get put on a credit card, which will end up costing more than the original expense, or dipping into a savings fund, which can also cause further financial setbacks.
There are different ways to set up an emergency fund. The first, and easiest, is to open a savings account that is linked to your main checking account. Have a certain amount automatically transferred into this account every pay period, so that the money is never missed. Once an emergency or unexpected expense arises, money can be easily transferred from this account and your primary savings remain untapped. This also keeps you from acquiring more debt, and will not disrupt your current budget.
Depending on your financial situation and needs, you can also set aside this money in cash, but beware, because it is easier to dip into this fund from time to time. Cash is readily available and “borrowing” from this fund defeats the purpose of it. If you do not trust yourself to keep these funds safe, try asking a trusted friend or family member to hold onto these funds until needed. Financial responsibility requires a level of self-discipline that many people lack.
Some people prefer to set a credit card aside for “emergencies” only. Although there is some logic to this method, credit cards are not for everyone. Some credit cards offer rewards, points, and cash back, but be very careful because many come with conditions and stipulations. If you do use this form of emergency fund, be sure that you have a high enough credit limit to cover a costly car repair or emergency room visit. However, paying this balance could prove very costly and setting aside cash for this purpose will save money in the long run.
Emergency funds are necessary to maintain a balanced budget and also for peace of mind. Having an emergency fund will take the edge off of stressful situations. Even though an emergency credit card is a temporary fix for these unexpected situations, it is better than not planning at all. A savings account, with regular small deposits, however, is the perfect solution, because it eliminates the debt entirely.