Why You Need to Setup an Emergency Savings Fund

Why You Need to Setup an Emergency Savings Fund
  • Opening Intro -

    The untrained eye may gauge the high disposable income in a population and surmise that the economy is doing just fine.

    That is before a study such as one conducted by the Fed Reserve in 2014 on Household Incomes and Decision making shatters that perception.

    In this study...

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Are You one of these 47 Percent?

In this study 5,800 respondents were surveyed online; the respondents were required to imagine they had an emergency of sorts that needed to be offset with $400. Just over half the respondents, 53%, said they could afford to pay up immediately. 47% of the respondents could not afford to pay up immediately. The 47% figure cuts across all demographics you can think about and at the heart of the matter is the age-old question of how to save for a rainy day.

How to Setup an Emergency Fund

To avoid going into debt to finance an emergency, you need to set up an emergency fund. An emergency fund is a savings account that holds at least six months of your net income. According to the online journal learn invest (https://www.learnvest.com/knowledge-center/so-what-really-counts-as-a-financial-emergency) the only time you can dip your fingers in an emergency fund are as follows:

  • When you have lost a job and the bills are piling up
  • When you are facing a medical or dental emergency
  • Your primary mode of transport is immobilized
  • You have a home expense like for instance, a leaking roof that needs to be sorted out immediately
  • When you are bereaved and need to cater for costs such as traveling

According to the online journal learn invest you need to apply the 50/30/20 rule to create an emergency fund. Broken down, these numbers work out as follows:

  • Fifty percent of your income should go to cater for living expenses such as rent, food, transport, utility bills etc.
  • Thirty percent of your income should go to cater for your lifestyle choices: entertainment,travel etc.
  • Twenty percent of your last bit of income should be used to generate/establish an emergency fund.

It is instructive to note that the last component (20%) of one’s income can be used to settle credit card debt and also pay for a pension plan. In the event that you have built up a 6-month buffer zone then you could use the extra income to clear off student debt or credit card debt.

Conclusion

Failing to create an emergency fund opens you up to financial distress in the case of of an emergency. You could end up piling up on your credit card debt or disposing of property just to remain afloat financially. This should not happen to you or those who you care about; to learn how to an emergency fund can be created log on to the following link (http://www.huffingtonpost.com/learnvest/how-to-budget-your-money-_b_5309696.html) and spread this word across different social media platforms, it will make a difference in someone’s life.

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