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The Household Budget and Emergency Fund

Aug 18, 2007
One of the biggest problems for most people when it comes to creating a household budget is trying to incorporate those unknown or unexpected expenses into the budget. When the car breaks down or there is a sudden medical emergency that needs to be paid for very few people have the means to just pay for it. In most cases they tap into their emergency fund by paying for it with a credit card. Yes, that's right, for the majority of Americans their idea of an emergency fund is a credit card.

Using credit cards for the emergency fund is a relatively new idea that didn't really begin to occur until the 1980's when credit and debt began to become popular. Before then people had set money aside in a savings account, in a jar, or under their mattress for just such an emergency. When something happened that required a large sum of money people just paid for it.

So how do you build an emergency fund and how much should it be?

Many financial advisors recommend that if you have large amounts of debt to be paid off that you should attack that first. There is little point in paying large amounts of interest on high rate cards while saving money. The interest on the debts cost more than any interest you may get out of a savings account and in many cases even high return investment plans.

If you are serious about building and emergency fund as part of your household budget then it makes sense to have a small emergency fund set aside to keep from using the credit cards you are trying to pay off if an emergency does occur. All you need for this initial savings fund is $1000 to $2000. After you have this amount set aside you can begin attacking those debts and get them paid off.

Once you have your credit card and other debts paid off you can begin building your permanent emergency fund. If you use the money you had been using to pay off your debts you should be able to accumulate the amount you need quickly and easily. It is recommended that a fully funded emergency account hold 3 to 6 months worth of living expenses. Once the fund is fully stocked just leave it alone. It is for emergencies only and should not be part of any investment plan.

There are several good places to keep an emergency fund; a savings or money market account, a separate checking account that pays interest are all good places to keep this money. It needs to be easily accessible where you can get to it if needed. Putting it in a certificate of deposit (CD) is not a good idea because the money is locked up until the term of the CD is up.

By setting up a working household budget you can easily see where your money is going and how you can best pay off debts and build a long term emergency fund. Once free of the lock credit cards and debt has on your money you can build wealth and live the life you have always wanted.
About the Author
Andrew Bicknell researches and writes on a variety of subjects. To learn more about building an emergency fund and family budget please visit his website Household Budgets by clicking here .
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