Starting an Emergency Fund

An emergency fund can come in handy in countless situations. Have you ever needed a little extra cash to pay a bill that has gotten more expensive? Or so you could cover a surprise visit to the doctor? Maybe you’ve faced a situation where you needed an emergency maintenance procedure for your car? We look at some tips on how to start and maintain an emergency fund.

A Credit Card is Not an Emergency Fund

Relying on credit cards in times of need can be one of the most disastrous financial decisions one can make. The accumulating interest payments will lead to even more pressure at a time when money is already tight. In addition, banks typically monitor credit card holders’ monthly payments, and may decrease the credit limit if they detect a pattern of financial difficulty (i.e. only making the minimum monthly payment for consecutive months).

Understanding the Need

An emergency fund can come in handy in many different situations. A few were mentioned earlier, but there are other more serious reasons. Losing your job is a big one. Having an emergency fund available could help hold you over for a month or two as you continue your job search. Analyzing your current budget and understanding areas where you can save is an important step in getting in the mindset of starting an emergency fund.

Assigning a Realistic Amount

The common practice for an emergency fund is to have an equivalent of three to six months’ salary saved. For example, someone making AED 10,000 per month should set his emergency fund at AED 30,000 to ensure their lifestyle will not take a huge hit in case of an emergency. They should then break this down into weekly saving targets. Let’s say they stash AED 500 a week towards the fund, it will take approximately 60 weeks to reach the fund goal.

Make the Emergency Fund Difficult to Access

Having the emergency fund easily accessible means that you can use this money for non-emergency reasons, which obviously defeats the purpose. A good idea is to place the money into a savings account that it is only accessible through a direct visit to the bank. Tell the bank you do not want the ATM card. Doing this will make it much harder to access the money and will keep it safe when the time comes and it is needed.

These are some tips to help you understand the need for an emergency fund. Once you have made the realization that it is an important piece of your financial life, begin by taking the necessary steps to start building your emergency account and allow yourself a cushion for unforeseen events.

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