Establishing Emergency Fund is Essential for Credit Repair
Posted on March 9, 2011
Consumers who are trying to reestablish good credit and are working towards their credit repair goals need to consider adding at least one savings goal to the mix of financial steps forward. While living paycheck to paycheck, it may be difficult to put any cash to the side but it is essential to tuck at least a few bucks every week into a savings account for emergency purposes.
The Point of Emergency Savings
For many people, an emergency fund is a component of their financial plan for the long and short term. For those working on repairing their credit, an emergency savings fund is an added layer of protection to ensure that they will not fall back into the same debt traps and credit problems of the past. An emergency fund is built up slowly to ensure that the funds are available for use when needed and only for emergencies. For those who hope to save up for a new car or other non-essential, another savings account should be established outside of the emergency fund.
How to Save Emergency Funds
The best way to get started is to select a high interest yielding account. You may have to look outside of your traditional bank to find a better interest rate. Many online banks are offering higher interest rates but it is important to research all of your options.
Once you have selected your bank, sit down with your budget and decide where you can make some cuts to begin putting cash into your savings. You may need to cut out your daily breakfast run or the like to find the spare cash. If you can only find $10 a week, start there and make a commitment to build up to a higher amount in the short-term.
The easiest pay to save is to automate your deposits. You can either set up a portion of your paycheck to be automatically deposited into your emergency fund account or you can schedule an automated transfer of funds from your checking account to your emergency fund. Most banks will allow such automated transactions. The theory behind the automation is that what cash you can’t see you are less likely to touch. It also is a great way to make some progress towards your savings goals which itself can be a strong motivator.
How Much to Save
Again, it will depend on your immediate budgetary needs as to how much you can devote to an emergency fund deposit. Over time the amount should increase until you reach your goal. Ideally, you should strive to save 6-12 months worth of living expenses in the event something should happen to your income. You can get an estimate of the amount based on your monthly budget totals. While you may not reach your goal for a year or more, it is important to keep going with your deposits and building up the account.
How to Spend Emergency Funds
It is ideal that the funds you save stay untouchable for as long as possible but still allow you access without penalty. A regular savings account should be fine but be sure that you do not request a debit card to go with the account or if you do, hide it away someplace safe to prevent the temptation to spend. If you have to physically go to the bank to withdraw money, the inconvenience will help to keep your impulse spending down.
You need to create a realistic list of situations that will allow for emergency spending. Some items to consider would be major home repairs, emergency vehicle repairs, back-up bill payments if you are short on income due to financial hardships, and medical crisis. Your emergency fund should remain untouched until there is a vital financial situation. Vacations, new furniture, and a trip to the casino does not constitute as an emergency.
Remember that the longer the money sits in the account, the more interest you accrue. As you begin to build a nice fund from the smallest deposits, you may likely be inclined to keep moving forward with new goals and other savings accounts. Having a back up resource for fast cash that costs you nothing more than a trip to the bank is a valuable financial necessity which helps to prevent the reoccurrence of debt-related problems.
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