What would it be like to have a pot of money available when youhave an unexpected expense? I used to think that unexpectedexpenses was something that happened very rarely. But it seemslike these days I have as many unexpected expenses as I doregular bills. One of the vehicles is always needing tires orrepairs, the washing machine needs replaced or buying a newwater heater (like I did just last week). That is where theCrisis Fund comes in.
If you have a budget in place, most of your regular paycheck isalready allocated for something. Ideally about 10% should be putaside for savings. It would be a good idea to use about half ofyour savings for long term savings and half for your crisisfund. Your long term savings would be used for large purchaseslike a home or money for college for the kids while a crisisfund would be used smaller purchases.
Your long term savings can be invested in many ways to yield thebest interest rate you can find since the money is intended tobe tied up for years. Your crisis fund needs to be in a savingsaccount or a checking account that earns interest to make themoney available on short notice.
You may even want to use your crisis fund for bills or expensesthat you know will be due in the future. A few examples of thiscould be school clothes for the kids, insurance payments thatare due every three, six or twelve months or even a balloonpayment on your mortgage.
One of the major reasons to have a crisis fund is to prevent theuse of credit cards. All of the purchases you would make with acredit card could be made out of your crisis fund. With theaverage credit card interest being 18% or more, just having thecash available could save you hundreds of dollars a year.
If you don't think you have money for a savings of any kind youmight want to think about ways of cutting back on something elseto creat a crisis fund. If money is extremely tight, you willprobably have to put off starting a long term savings.
Even putting $5 or $10 a payday away will help when you need it.
ABOUT THE AUTHOR
Terry Rigg is the author of Living Within Your Means - The Easy Way http://www.homemoneyhelp.com/ebookadpage.html and editor of The FREE Budget Stretcher Newsletter and Budget Stretcher web site http://www.homemoneyhelp.com. He has 25 years of experience counseling individuals and families concerning their personal finances.