January 22, 2011

Emergency Funds: Preparing for the Bad Gives You Options

As you work to eliminate your bad debt and try to pay down your mortgage, you should also consider another method of maintaining your financial stability: that of creating and keeping an emergency fund in a separate savings account.

Why an emergency savings account, you ask? Well, the simple answer is this: having a savings account just for emergencies can protect you against having to liquidate your assets, draining your bank accounts, and cutting into your retirement fund. In other words, an emergency savings account could be enough to protect your financial stability should something terrible befall you and your family.

Of course, there's the risk that such a savings account might never be used. This is a good thing, certainly, but it would also mean that the money you had set aside won't be doing anything for you, except accruing interest. Despite this, you can still manage the account to be an emergency fund that benefits you. For example, you can try to figure out how much at the very least your comfortable having as a sum of emergency money, and the rest of the account you can put towards other short-term savings goals.

No one likes to think about the possibility of something bad happening, and yet all around us we can see evidence of what happens if there isn't a plan in place to recover. We saw this lack in the government's response to Hurricane Katrina. We saw this lack in how BP dealt with the explosion and subsequent spill in the Gulf of Mexico. And we saw this lack in New York City's response to the recent blizzard. Obviously, our lives exist on a smaller level, but that doesn't mean we cannot learn from the mistakes others, even large entities, make in not preparing for disasters.

An emergency fund gives you the freedom to make decisions regarding how you'll respond to and recover from an emergency. In the event of a natural disaster, having an emergency fund gives you the options to stay elsewhere while your house is rebuilt, and this option might exceed what insurance could give you. An emergency fund might allow you to extend your leave of absence from work should you be injured in a car accident, or it could give you access to a better kind of treatment. An emergency fund could give you the ability to help out a relative or friend who is in sudden trouble.

Really, what we have found is this: money gives us options in life. If we carefully manage our money, we give ourselves more options from which to choose as we make our way through life, and the good and bad that we will inevitably encounter. Creating an emergency fund for yourself is one way to keep your options open when the bad finally comes around.

This guest post is contributed by Raine Parker, who writes on the topics of accounting degree. She welcomes your comments at her email Id: raine.parker6@gmail.com.