Emergency Funds: 3 Essential Things You Should Know

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Are you trying to develop a plan to save for your retirement? If so, starting at a young age can help you have plenty of time to save enough. Before you start saving for retirement, though, you might want to create a sufficient emergency fund. A financial advisor can assist you with this task by helping you understand three essential things about emergency funds.

1. The Purpose Of An Emergency Fund

An emergency fund is an account you have that contains money you can use for emergencies. For example, if your refrigerator breaks and you must buy a new one, you can use money from your emergency fund to pay for it. If you need car repairs, you can use the money from this account to pay the bill. The purpose of an emergency fund is to have some money on hand that you can use to pay for the unexpected surprises in life. Your budget will not suffer when you experience extra bills and expenses when you have money designated for emergencies. A financial advisor can explain this to you in further detail if you still have questions.

2. How Much You Need In The Fund

You might want to ask your financial advisor about how much money you should have in this fund. While the answers can vary, a safe amount to have is enough to cover at least three months of your living expenses. To find out how much this is, look at your monthly budget. How much money do you spend each month on your bills? How much extra money do you spend? Adding these amounts together can help you determine how much you need each month. You can then multiply this number times three to determine the right amount for your fund.

3. Why You Should Set It Up Before You Focus On Your Retirement Fund

While you can save for your emergency fund and retirement simultaneously, it is often easier to focus on one thing at a time. If you work hard to build your emergency fund, you can get that out of the way, leaving you with more money to use for your retirement planning.

Having an emergency fund is essential for your budget. Once you create one and fund it, you can start planning your retirement fund strategy. To learn more about these topics and other financial issues, talk to a financial advisor.

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