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Don't Underestimate the Value of an Emergency Fund

Don't Underestimate the Value of an Emergency Fund

From today's necessities to tomorrow's retirement funding, covering your financial bases is a tall order - particularly during challenging times.  Under ideal circumstances, your household income is enough to meet repeating obligations, like housing costs, car payments, and grocery spending, with enough money left over to contribute regularly to your future financial security.  And that with continued hard work and good fortune on your side, it remains possible to build a comfortable and secure lifestyle, without excessive money worries.  At times, however, unexpected setbacks can interfere with cash flow - even preventing you from staying current with creditors.

The stakes are high, so protecting yourself from catastrophic consequences is a marked financial priority.  Too often, however, the importance of a personal emergency fund is eclipsed by more immediate demands, leaving families unfunded for personal disasters and other forms of financial distress.  For the best results building resources and protecting your assets, don't underestimate the value of maintaining emergency reserves.

Rainy Day Fund Serves Diverse Financial Concerns

If there is one thing you can count on; it is unpredictability within your spending budget.  Maintaining a contingency fund helps mitigate problems when they do arise and gives you peace of mind, knowing you are covered in the event of unexpected financial demands.  A safety net will protect you in the event any of the following sets you back:

Divorce - Joining financial lives with another person is a leap of faith, which can help both parties become more prosperous.  However, when relations deteriorate beyond repair, the financial fallout can drag down everyone involved.  Generally emergency reserves are not considered a "divorce fund," but breaking up has very real financial consequences.  A contingency or rainy day fund helps hedge against lasting damage and alleviates some of the stress associated with the difficult process of parting ways. After all, it is easier to split up assets than it is liabilities.

Layoff - Despite recent economic improvements following a major global downturn, many workers are still vulnerable to short and long-term layoff.  Perhaps more than any other single unfortunate influence, an income interruption caused by job loss or layoff has the power to quickly undermine household finances, leading to damaging shortfalls.  Although unemployment compensation may be available, emergency funding helps bridge the affordability gap, until full-time wages are once again flowing through your home.

Medical demands - Health crises impact your financial flow in two distinct ways.  For starters, grappling with a medical condition may require time away from work, interrupting cash flow when you need it most.  And since even the best insurance coverage carries out of pocket costs, unexpected medical concerns can lead to substantial spending on diagnostic tests, office visits, and prescription medication.  A well-funded emergency account can keep you afloat during the darkest financial days, allowing you to focus on healing rather than adding worries to your medical challenge.

Start-up - Entrepreneurism isn't for everyone, but when opportunity knocks, some self-starters can't resist answering the call.  Although it doesn't fall under the same parameters as other "emergencies" on this list, self-employment is a worthy place to devote emergency resources, provided your vision is backed by a solid business plan.  When a once in a lifetime money-making venture is at your doorstep, emergency funds can be used for research, marketing, capital costs, and other practical start-up needs.

Unanticipated household expenses - In addition to its structure and appointments, your home is also filled with many machines, subject to care and maintenance costs. Repairing and/or replacing appliances, for instance, can place short-term pressure on your financial flow, resulting in substantial spending on ranges, washers, refrigerators, dishwashers and other domestic machines.  In many ways, fundamental concerns like keeping a roof over your head are the forces driving emergency fund priorities, giving you a clear reason to give your emergency account the attention it deserves.

Without a safety net, your personal finances remain vulnerable to distress resulting from unexpected domestic expenses, medical costs, income interruptions, and divorce.  By maintaining well-funded reserves, on the other hand, your interests are protected and money is available for emergencies and income generating opportunities.

Mr Hamster stores his safety net in his cheek. Be creative people!

Mr Hamster stores his safety net in his cheek. Be creative people!

Making the First and Second Million in the Silicon Age

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