- An emergency cash fund is a reserve of money that someone keeps in case unforeseen circumstances require him to spend a large sum on short notice. Circumstances that might require the use of emergency funds include unemployment, damage to a home or vehicle, and health-care emergencies. Most financial advisers recommend that their clients keep a certain amount of liquid assets on hand to act as an emergency fund.
- The usefulness of an emergency cash fund cannot be overstated, and it comes with the benefit of additional peace of mind. The biggest hurdle to an emergency cash fund isn't convincing someone (or yourself) that maintaining one is a good idea, but rests in the ability to find spare cash to commit to the fund in the first place. Many people operate on tight budgets with little leeway, while others are unable to control their spending to build up savings. Another problem is that many people carry credit-card debt, which eats away at savings through interest payments. It is usually best to first pay off credit cards in full, and build up a cash reserve second; the sooner you get out of credit-card debt, the more money you will have to commit to an emergency fund in the future. Also, emergency funds should be kept in high-interest-bearing accounts, such as online savings accounts, so they are able to grow on their own while still being readily accessible.
- Another problem many people have when it comes to saving money for an emergency fund is deciding what constitutes an emergency. Someone who loves designer bags might consider missing a big sale an emergency, but such a use does not constitute an emergency in the way the term is intended. It is doubly difficult for spendthrifts to properly use an emergency fund: They may struggle to save the money to make one, and they will also be tempted to use the money on large, unnecessary purchases. At its heart, an emergency fund is meant to get people through something that would otherwise force them into bankruptcy or cause great hardship. Essentials like food, clothing, a home, health and education can all be valid uses of emergency funds.
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