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I have seen people who were genuinely committed to building their credit. They were using their credit cards responsibly, staying away from unnecessary debt, and paying their bills on time and then some unforeseen emergency happened to where it completely derailed their progress. They had to either utilize their credit cards or take out a payday loan with an extremely high interest rate. In some cases, this emergency would put them behind on their bills and of course, their credit score would suffer leaving them disappointed and even worst, in debt! Sometimes, when you are living paycheck to paycheck, you may feel that it is not a priority however; the fact that you do not have disposable income is why an Emergency Fund is essential to your financial well-being! Financial experts recommend establishing an emergency fund before you focus on paying off debt. Of course make the minimum payments on all credit cards or loans as scheduled, however trying to pay down debt with no emergency fund is unwise being that you’ll find yourself in the same cycle of utilizing credit to cover unexpected expenses! Instead, establish your emergency fund and once you’ve accumulated at least $1000.00, you can then focus on aggressively attacking your debt!
What is an Emergency Fund?
An emergency fund is money that is set aside in an account (a high yield savings account is best) for life’s unexpected expenses such as car repairs, medical expenses, appliance repair, and or unexpected time off work. These funds will help keep you afloat without having to rely on credit cards or loans or having to decide which bill you may have to skip this month!
How much money do you need for your Emergency Fund?
Most financial experts suggest that you save three to six months of your living expenses however if you are on the path of rebuilding credit and reestablishing yourself financially that amount may not be plausible for you right now, so start small! Saving 500.00 to $1000.00 can still help prepare you for the most common emergencies. As you reduce your debt and create a more manageable budget, you can add to your emergency fund.
How do I build my Emergency Fund?
Saving your first $500.00-$1000.00 is not as hard as you may think. Set a weekly or bi-weekly savings goals to start your emergency fund. Make it apart of your budget and cut other unnecessary expenses rather than blowing off your emergency fund! Also, if you get a tax return, put $500.00-$1000.00 in your emergency fund. Remember, this is only a start; if you can afford to put more in there and you do not have any major debt then you should do so! Do not make this an option!If you do not get a refund then there are still options to help you save up your first $500.00! You can sell old items such as cell phones, shoes, and/or clothing. I used PoshMark to get rid of old shoes and clothing and within a couple of months I earned $645.00! You can also cut back on expenses, Uber, and work extra hours if your job permits, to put up your first $500.00! Whatever it takes, make it happen!
Where is the best place to keep my Emergency Fund?
It is best to put your emergency fund in a high yield savings account that is easily accessible to you! Keep it separate from any other savings or checking account you may have. Unlike your other savings, you do not want to put your emergency fund into any type of investment accounts or CDs that may have a penalty for early withdrawal. Once you start accumulating a large amount in your emergency fund, it may be tempting to think of it as money accessible to you for frivolous spending or expenses so make sure it is completely separated from any and all spending money.
What would be considered an Emergency?
So those new shoes that just came out would not be considered an emergency, no matter how bad you may want them! J Funds from your emergency funds are for unexpected expenses such as (but not limited to):
- Car repairs
- Medical/Dental Expenses
- Household/Appliance repairs or replacements
We all love new clothes and vacations however you do not want to mix money you’re saving for an emergency with money you may be putting up to save for some of these wants. Instead, create a separate account to save for clothing, makeup, vacations, etc.
Several of us have been there before when an appliance went out or your car battery died and it caused us to have to start the vicious cycle of payday loans, overdrawn accounts, or maxed out credit cards. It is so easy for a simple car repair to snowball into a financial disaster. Being prepared and having an emergency fund is vital to financial security and protecting your credit. If you a serious about building credit and getting back on track financially, establishing an emergency fund should be your first step!