You mean I don't need a credit card?
Saving is different than investing. Saving creates stability. It is meant to be used in the short-term and should not be exposed to risk.
So what is an emergency fund? This is not a vacation fund or meant to be used at the mall during a sale. It is for those unexpected events in life - loss of a job, transmission goes out in your car, and so on.
If you're just starting out in the Dave Ramsey plan, baby step one says to have a small emergency fund of $1,000 to make it through most small emergencies while you're paying off your debt (daveramsey.com).
After you're debt free, you can move on to the fully funded emergency fund.
The general guideline for a fully funded emergency fund is 3-6 months of your expenses. For some people three months is enough, others feel that nine months is best. Go with your gut and commit to whatever makes you feel the most comfortable.
When to Use it
If you feel that you are faced with an emergency, ask yourself three things before digging into your emergency fund.
- Is it expected? If it's something you can see coming, like Christmas, you should save for it separately.
- Is it necessary? If your family only has one car, it's probably necessary to fix it when it breaks. New furniture? Not necessary. It's great to have new stuff, but don't dig into your needs to pay for your wants.
- Is it urgent? The last thing you need to worry about is money when a situation arises. So when an immediate need comes up, focus on the task and let your emergency fund cover the money aspect.
If you tap into your emergency fund, that's ok! Just be sure you work to build it back up again as soon as possible.
Questions about saving?
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Content should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of the publication and are subject to change. Content should not be viewed as personalized investment advice. All investment strategies have the potential for profit or loss.
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