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Emergency Funds: Why Is It Important And How To Build It

Personal finance management isn’t just about staying away from debt, it is planning way ahead to prepare oneself in the event when an unforeseen circumstance arises that will require for you to have access to a pool of funds. According to Bankrate.com, about 57 million Americans are just one emergency away from a financial disaster. This is a very scary thought and an extremely dire situation to be in. We never know what the future holds so it is best to be prepared for whatever life brings us.

What is an emergency fund?

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An emergency fund is basically money set aside needed in the event of a financial crisis such as an illness, loss of a job, when a calamity strikes or even death. This pool of money should be enough to cover at least six to nine months worth of living expenses to give yourself ample time to recover from a financial setback.

How to build an emergency fund?

Before building an emergency fund, it is essential to identify what is considered as an emergency and how long the effect of this dilemma will last. There are small-scale emergencies such as a broken car in need of repair or an appliance that needs to be replaced immediately. Then, there are large-scale emergencies such as illness that require hospitalization and long-term medication, loss of a job or when a calamity strikes such as fire or earthquake.

After identifying what counts as a true emergency, it’s now time to plan and build an emergency fund.

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  1. Review your monthly household budget. Track how much is your actual monthly income and expenses. This is a bit easier if you are single. But if you have a family to take care of, it is best to consider their needs as well and how much the cost will be on a monthly basis. Utility bills, loan payments, and monthly savings all also to be taken into consideration.

  1. Set a realistic goal and timeframe. After going over your monthly budget and have considered each of your family member’s needs, you can now set a goal on how much you wish to save in the next six months or so. If your current monthly budget only allows you to save $200 on your set timeframe, then stick to it. You may work yourself way up eventually unless you are willing to make necessary budget cuts to beef up your emergency funds right away. But if you have access to some extra cash and you got everything practically covered, including your savings, then it’s only prudent to put your extra cash on your emergency funds savings.

  1. Make your funds easily accessible. The essence of an emergency fund is having cash you can easily get your hands on in times of need, so keeping your funds in a place that will require a lot of paperwork before you can withdraw your funds defeats the purpose of having an emergency fund in the first place. Put your funds into regular savings account that you can withdraw at any time without penalty because the last thing you’ll want in a time of crisis is to deal with paperwork and pay penalties just to access your own money.

  1. Have restrictions. Know your limits. Keep in mind that your emergency fund is for serious and unexpected situations. Week-long vacations on some exotic location, Black Friday sale, and retail therapy because you want to blow off some steam or make yourself feel better after a bad break-up do not qualify as an emergency situation. Emergency funds are not also meant to be used to pay off your debts. Any purchase or trips should be thought of carefully and must be according to your budget.

No one wants to be left in financial ruins after a major setback in life. Think of your emergency funds as one way of securing your and your family’s future financially without having to resort to taking out debt after debt just to make ends meet and sustain your family’s basic necessities. Make this one of your top priorities and you will surely have a stronger foundation towards financial security.

Have a backup plan. Just in case…


If building up an emergency fund seems impossible due to debts that you are struggling to deal with, consider hiring the services of a professional to know about debt relief options that you can avail. Debt relief programs, as its name states, offers relief to those who are saddled with debt.  A highly-experienced debt relief counselor can help you explore options and put you in a payment plan based on your current financial situation. This way, you can take care of your debt without having to drain your monthly budget. Once you’re out in the red and have your finances back on track, you can proceed with rebuilding your emergency funds because nothing is more comforting than not having to worry about money, even in tough situations.


Debt Relief Programs – Your Options To Get Out Of Debt



Debt: The Good, The Bad, And The Way Out

Everyone wants to live a debt-free life. Financial problems brought about by having huge debt impacts virtually every aspect of our lives that is why we do everything we can to avoid it. Debt, in its simplest definition, is just borrowed money used for whatever purpose we have in mind. If we look at it this way, debt sounds neither good nor bad. It’s just what it is. And while it is entirely possible to live a life free from the burdens of having a debt, there are times when taking out a loan is the right decision to make.

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Purpose is What Makes The Difference

As stated earlier, debt is defined as money borrowed for an intent one has in mind. This intent is what makes the distinction between a debt good and a bad debt.

They say that “it takes money to make money.” Good debt is money taken out and used as an investment to help generate income. A loan that was taken out and used to kick-start a small business is an example of a good debt. All business owners expect to earn and gain profit that would soon pay for the loan. Student loans can also be viewed as an example of a good debt. Every student sees a “return on investment” once they graduate and enter the workforce in their chosen field. Real estate mortgages, when used strategically, can also be a form of good debt. A residential property can be rented out, thus making it self-amortizing, and once the mortgage is paid off, the property owners can finally start earning from it.

Bad debts, on the other hand, are debts that are used to purchase anything that depreciates in value and do not generate any income for the debtor. These are the liabilities that have to be avoided at all cost. Cars may be a necessity but it is expensive. Unless you have the money to pay for a brand new car in cash, it would be better to put a hold on your plans for signing up for a car loan. Cars depreciate in value every year. In the event that the car owner decides to sell his car, it would be for a much lower price than its original value. Consumer loans such as credit card debts and payday loans are probably the worst kinds of debt. These debts are often used to make ends meet, or to sustain the “wants” of a person. Bad debt doesn’t do any good for parties involved: the debtor loses money in paying the interest alone, and may soon be buried in a mountain of debt, assuming the debtor no longer has the capacity to pay for it. Creditors lose money on bad debts that are no longer collectible.

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The Backup Plan

Taking out a loan is always a risk. A fresh graduate may not find a lucrative career opportunity right away which may lead to struggles in paying off their student loan. Real estate properties may suffer damages brought about by unforeseen circumstances such as fire or natural calamities and will definitely cause a loss of income. Startup businesses may take a while before it generates the expected income. As for bad debts, these could get worse when a debtor lacks financial management skills and is stuck in the dreaded minimum payment loop.

Good debt and bad debt have one thing in common and that is they are both accruing interest. If the debtor hits a financial snag along the way, unpaid debts, along with its ballooning interest rate can be a problem.

It is essential to have a backup plan in case things don’t work out. Having ample savings to cushion one’s fall during hard times is perhaps one of the best backup plans a debtor may have. Savings should be enough to cover basic necessities and loan payments for at least three to six months. For business owners, emergency funds should be enough to cover operating costs and other expenses. This will give any indebted person time to recover and get back their finances back on track much easier than having no savings or emergency funds to count on.

In the event that a debt becomes too much to handle, an indebted person may consider entering a debt relief program. Debt relief programs, as its name states, offers relief to a person whose debt burden becomes too much to bear. These programs may offer either partial or full relief from one’s debt. Most debt relief companies offer a free consultation to their clients to see which program best fits their current financial situation and capacity to pay. Once enrolled in a program, it is best to commit to the agreed plan to have the debt problem resolved, otherwise, noncompliance to the plan may get a debtor kicked out of the program which may lead to even bigger financial problems.

Final Words

Money is best handled with wisdom and discipline, especially if that money is borrowed. Keep in mind that even those considered as good debts may turn into bad debts when handled thoughtlessly. Most of all, debts should be paid off as soon as possible. Do not let yourself get stuck in the minimum payment trap and suffer the consequences later on. Good decision-making along with sound financial management skills will make any debt less of a burden and more of a much-needed help to anyone who needs it.