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Saving: Building a Savings Emergency Fund

Provided by the International Finance Corporation

Count on it — throughout your life, you can expect the unexpected.  And when those surprising events result in unplanned expenditures, they can wreak havoc on your budget.

Think about the events of your life during the past year or two.  Did you have unexpected car repairs? Was your child sick or injured and required medical care?  Did your home need repairs? Was it necessary to take an emergency trip somewhere?

Life events often seem to occur when you are the most vulnerable.  So isn't it wise to act as if life's next little surprise will not be a surprise at all, but an eventuality?

Confronted with bills that your income cannot cover, it makes sense to turn to your savings. However, many people are unable to save or have not saved adequately.  If their savings are paltry, they may be able to pay a traffic ticket, but what about a major car repair?  If you don't have money you can easily access without penalty, you may be forced to choose from several undesirable options.

One detrimental option may be to pull money out of a retirement fund, if you have one.  But the money in these accounts should be considered untouchable, earmarked solely for your retirement years.  Even if you are allowed to draw money out before the designated retirement age, many countries have penalties for early withdrawal.  These can include early withdrawal fees in addition to being taxed on the disbursement as income.  Put together, these penalties can be substantial and result in the loss of a significant percentage of the value of your retirement fund.

Another undesirable option may be to use credit to finance the life event.  If you don't have the cash to pay for a new washer and dryer, for instance, you may finance your purchase.  It's tempting to use credit to pay for items you can't afford.  But be warned — if you make only the minimum payment when you receive the monthly bills for the financed item, your purchase will become far more expensive due to the added cost of interest.  If you must use credit, always try to pay more than the minimum when you receive the bill each month.

Easily the most desirable option is to have a savings cushion in place that is equal to three to six months of your monthly expenditures.  Calculate your monthly expenses by completing a budget form.  Then multiply this total by three.  This will be the minimum amount that you should have deposited in an accessible account such as a bank savings or checking account.

With a financial safety net in place, life events will not cause such desperation.  There's nothing like the peace of mind that comes from the knowledge that you have emergency money on hand to provide a temporary reprieve from life's unexpected events.

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