Create an emergency fund to avoid costly, unnecessary debt

fire safety used as a photo illustration for creating an emergency fund

Starting an emergency fund now will help avoid taking on expensive debt in the future. markbarky/Flickr photo.

Not having an emergency fund is why most people end up carrying too much debt. Without an emergency fund, the slightest hiccup in a person’s life can result in debt. A greater disruption can be a total financial disaster. As a rule, people don’t expect the unexpected. And creating an emergency fund is easier said than done. But the nickels and dimes that get wasted every day add up to dollars that can’t be used tomorrow. So perhaps creating an emergency fund is easier than most people think.

Everybody needs an emergency fund eventually

Consider car repair. To emphasize the need for an emergency fund, Brad Chaffee at Enemy of Debt tells a cautionary tale. He was getting new tires for his car at Sears and noticed a woman who faced a big repair bill. She had no extra money, along with bad credit. She couldn’t qualify for a card from Sears, which makes a bundle offering high-interest credit. But the helpful customer service rep found her a card she could qualify for — with a $400 line of credit, a $59 annual fee and a 28 percent APR. Even that card, with its harsh terms, wasn’t enough to help her.

Saving is a bill that must be paid

For people who don’t have an emergency fund, Bankrate says it’s way past time to get serious about creating one. A shaky economic recovery could lapse into a double dip recession. Bankrate recommends stashing three-to-six months in living expenses and emergencies. Taking $50 a month and putting it into a money market account is a good start. Treat the contribution as a bill that must be paid. When the money market account has two months of living expenses, move one month of expenses to a one-month CD. When the CD matures, roll the principal and interest into another one-month CD. Eventually, the emergency fund will have another month of living expenses that can be invested in a two-or three-month CD. Eventually the fund will be able to purchase a six-month CD.

The best stress relief money can buy

Some personal finance basics will help develop an emergency fund. Studenomics recommends paying the emergency fund first before all the other bills. From there, people don’t have to be cheap if they spend money wisely. Especially if they can control their debt (see emergency fund). And there’s nothing wrong with enjoying life. Saving and managing money doesn’t have to be a drag. And best of all, by saving and managing money a person can enjoy life more. An emergency fund is a great stress reliever. Plus, it provides some leeway for dining out, entertainment and a worthwhile family vacation.