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Protect Your Credit With An Emergency Fund

Posted by Chris Devin  December 20, 2013 12:04 PM

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By Nik Tsoukalis

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When you have gone through all of the trouble of credit repair, you want to ensure that you do not wind up with bad credit again. But, in many cases, people do not wind up with bad credit because they are irresponsible. It is because they were unprepared to deal with surprise medical bills, expensive home repairs, last-minute vehicle replacements or other calamities. This is where a healthy emergency fund comes in.

How Much Should Be In Your Emergency Fund?

Add up all of your fixed expenses for a month, then multiply that number by three. That is how much you will need to have on-hand to keep yourself relatively stable should something interrupt your earnings for a three month period. Three months expenses is the most common recommendation for emergency funds; some experts recommend keeping six months expenses on-hand.

This fund isn’t just for loss of income. It is also for handling unexpected bills. For instance, after your home purchase, you will want to have extra cash available to deal with the inevitable emergency repairs every homeowner eventually faces.

But I Can’t Save That Much!

If you are not in the habit of saving, or if you are living close to the edge of your means, putting aside thousands of dollars can seem like an impossible feat. It can be a lot easier if you break the task down into smaller parts. Start by putting away just $10 a week until you have enough that you could pay your electric bill out of savings. Then, aim for two bills worth. It’s easier if you set up an automatic withdrawal so that you never see the money in your account.

You may be able to free up more money by going over your bills and seeing if there is anyplace you can cut back. Look at monthly membership fees like your gym or Netflix account and decide whether you can go with a cheaper plan. Or, eliminate one restaurant dinner a month and sock the money into savings instead.

When Can I Touch My Emergency Fund?

Set up firm criteria in advance so that you aren’t tempted to dip into your fund prematurely. The emergency fund is not for vacations, splurges, or even great deals that you would otherwise have to pass by. Set up a separate account for impulses so that you can keep your emergency fund secure.

The only times you should dip into your emergency fund is when you have little other choice. For instance, if your car needs expensive repairs, it is okay to use the fund for that. It is also okay to dip into the emergency fund to cover basic bills if you have been laid off from your job or have been out for an extended illness.

An emergency fund is a great tool for keeping your credit score high and your family secure. By keeping these funds on-hand and available, you can help ensure your family’s future stability.

For more information on how you should budget for a rainy day and how to protect your credit score click here to request a free consultation.
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