The Importance of an Emergency Fund

Most people tend to be faced with a financial emergency at some point of their life. So, it is most likely, that you too may have faced such contingencies, or may experience such situations in future. A financial emergency, may arise in various shapes, such as an immediate auto repair, caused due to a break down, or an unexpected medical bill, or a lawsuit filed by your neighbor.

Now, an average American, tends to pull out his or her credit card and pay for such contingencies, thereby increasing the debt burden, which he or she might already be suffering from. In worst cases, they may even not be accessible with credit, which may lead to far worse consequences. In such a situation, a person may be forced to go for high interest loans; by mortgaging his/her assets which may further lead to foreclosure of property.

However, unlike what most people think, one of the easiest ways, is to have an emergency fund at your disposal. So, an ideal emergency fund would be large enough to cover around three to six months of the living expenses. This way, in case you lose your job, then in that case, you would still have enough money for paying your bills while you are searching for another job.

As has been discussed earlier, an emergency fund tends to do a much better job than bridging the gap in between your income. It would serve as a life buoy, which you can look, up for support in times of distress or acute financial emergency. So, in case you meet an automobile accident, then in most probability, your car insurance company would require you to make a deductible payment before it pays out for any kind expenses. In case you lose your contact lenses, then in that case, you would be required to buy a new pair. Problems like these may arise at any point of time.

As a rule of thumb, an emergency fund must be spent on the things, which you really need and not the things, which you simply want. So, your emergency fund should not be bearing expenses like new furniture, when the old furniture is in just good shape, or a new part wear, or even a pack of cigarettes. Make sure, that your emergency fund is there to pay for your true emergencies. For this, the best way is to go by a budget. So, make a budget for yourself, and make sure that you follow the requirements of your budget.

Although the economy has gained a bit of stability in the last few months, the situation is pretty far from encouraging. This has resulted in a number of job cuts. As a result, more and more people are making late credit cards payment. In fact, the situation is poised for a graver turn of events, if the situation does not improve soon.

A major effect of this situation is that, with a rise in late credit card payments, there has also been a reduction in personal savings rate, which has gone down by a huge margin. This has further worsened the situation as a vicious cycle is formed, where one factor leads to another.

This further leads to a sudden change in credit policies, whereby, stiffer conditions are imposed in regard to obtaining loans from the banks. When such a condition occurs, the small and the medium sized entrepreneurs are the worst hit lot. With lending institutions, as well as investors opting for less risky investment options, while the small and medium sized enterprises are clearly left to fend for themselves. Most times, we see a sharp decline in availability of credit, often diminishing the relationship between credit availability and interest rates.

Such a situation has been said to be a direct result of huge bad debts incurred by the credit card companies and lending institutions. In order to keep up with the competition, most lending institutions lower their criteria for credit. This leads to a large number of inappropriate debts, as a result of which, credit crunch occurs. Although this is not the only reason; but definitely it is one of the most common reasons.

Apparently, the credit card user is also not in a very good condition either. Most of the times, he/she is lured into a honey trap, wherein, he is made to believe that he/she is being handed over this wonderful tool; and in lieu of it, he is being charged a very minimal amount, which is actually peanuts in comparison to the advantages, which are being bestowed upon him/her by this magnificent piece of plastic.

The average guy today carries around five to six credit cards in his wallet; literally buying products at will, simply because the credit card firms have made him/her believe so. But the myth gets shattered, when he/she finally catches up with your credit card bill. By the time the user realizes that there are no free lunches in the world, his entire budget is in doldrums.

Many a times, a user is misguided, kept in the dark about hidden charges and at times, blatant lies are thrust upon him/her. As the user scrolls through the bill, he realizes the hard way, THE RIGHT COST OF CREDIT CARD DEBTS. The economy too realizes it.