By John W. Lee, P.C.
Did you know that being able to pay your bills on time and afford your necessities does not make for financial security? Unfortunately, you are not financially secure if you don’t have enough money to fix your car when it breaks down. Paying off your credit cards and getting ahead on your mortgage are both wonderful financial moves, but what good does it do if you have an emergency? This especially is the case with an emergency such as an inoperable car. You could run the risk of losing your job if you can't get to and from your place of work. I recommend that everyone have at least one thousand dollars set aside for emergencies. This fund could be used for a medical emergency, a need to travel to see an ailing family member, or to fix your car or house. If the fund is used, it should be replaced immediately.
Once your emergency fund is established, you should begin to build at least one month’s expenses in reserve. I recommend starting with one month’s expenses in the bank, and then growing that to up to six months expenses when you can. This money does not have to be in the savings account drawing virtually no interest, but it should be in a liquid asset that can be readily accessible.
Another way to look at this is to have a little bit of cushion in your budget. If you are living paycheck-to-paycheck, then you risk the slightest unexpected expense messing up your budget for the month. The problem with this is that you may find yourself running late on payments and being charged additional fees, penalties and interest. When you are paying your bills a month in advance, you are never paying late fees and extra interest. Also, folks that pay their bills month to month run the risk of getting behind and perhaps feeling the need to go to a pay day loan place and compounding their problems with high interest rate loans.
The first step in financial security and stability is to build these cushions. It's often very tempting to spend money that is left over after all the bills are paid, especially as hard as you work for your money. Don't forget, though...The best gift you can give to yourself is that of financial security. Once you build these emergency funds, you may even find yourself more able to manage your money. Wise financial decisions often lead to more. This would be the point that you could begin to consider paying off your credit cards, getting ahead on your house or car payments, and other things that will benefit you in the long run.
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