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ToggleHaving an emergency fund is integral to your financial security and long-term financial health. If you’re pulling out the plastic for every unforeseen situation, you’ll find it difficult to save or invest, and you may even go into debt. In that case, you may need to get a title loan estimate. Here’s what you should know about emergency funds and your financial safety net.
What is an Emergency Fund?
It’s basically a cash reserve set aside specifically for unplanned expenses or financial emergencies. Setting up a dedicated fund will help you recover quicker from life’s inevitable financial emergencies — your car breaks down, you need a new home appliance, job loss, for example — and get back on track without incurring high-interest debt.
The rule of thumb is to have at least three to six months of expenses saved. Start with $1,000 and be intent on building it up.
Building an Emergency Fund
Before you start to build an emergency fund, you need to set a goal, the size of which is determined by your income, monthly expenses, and lifestyle.
Begin by creating a budget to track income and expenses. You may also see areas in which you can cut back, such as under-used subscriptions or that daily drive-through coffee. Depending on the planned size of your fund, you may find that you need to bring in more income. Perhaps you can get a weekend job or consult or freelance.
Decide how much you can put away monthly, then each month put that amount away first. Make the fund a priority. If you have one-time savings opportunities such as work bonuses, tax refunds, and the like, you can use them to boost your emergency fund.
How is an Emergency Fund Different from Regular Savings?
A savings account is money earmarked for a certain goal such as a new car, while an emergency fund is used to cover an unexpected situation. So, the difference between the two funds is timing: a savings account is for “planned” expenses while an emergency fund isn’t.
How Do I Know When to Dip Into the Emergency Fund?
To be sure you’re tapping your emergency fund appropriately, ask yourself whether the expense is truly unexpected. In other words, avoid using your fund for predictable or recurring expenses such as anniversaries or birthdays, for which you already should have budgeted.
Also ask yourself whether the expense is necessary. You may need to weigh wants versus needs here. For example, you may really want the latest iPhone, but you shouldn’t use your emergency money for it.
Another question to ask yourself is whether the issue is urgent. An emergency can be generally described as something that necessitates immediate action. Job loss, car repairs, or home repairs are in that category.
Where Should I Keep My Emergency Fund?
Rather than under your mattress, you should consider keeping your fund in a low-risk liquid account such as a high-yield savings account. Your money can grow faster in this kind of account than it could in a traditional savings account, since the interest rate will be higher.
You also may want to consider a money market account, which also has higher rates. You also get a debit card as well as check-writing privileges. Another option is to simply open an additional account at your existing bank or credit union. Keeping everything under one roof can reduce the temptation to pull from their emergency account.
In Summary
Yes, a car title loan can help you out in a pinch. But if you don’t want to get into that situation to begin with, establish an emergency fund. It’ll provide you with financial security as well as piece of mind.