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Even wealthy households can not cover an unexpected cost of $ 400 – the colorful fool

Saving for the future is not easy, especially if you probably have multiple financial responsibilities that steer your money in different directions. Between mortgage, car payment and all your other household bills, finding a cash for your savings is a challenge. When it comes to setting up an emergency fund, it's tempting to put this task at the bottom of your priority list.

Many households find it hard to put aside money for unexpected expenses. According to a report from the Center for Retirement Research at Boston College, it's impossible to cover $ 400 in unexpected expenses. Not surprisingly, those with lower incomes had more problems. 72% of households earning less than $ 25,000 a year were unable to raise $ 400, according to the survey.

However, it is not just low-income workers who are having difficulty saving. Almost one in five households earning $ 1

00,000 or more a year could not find an additional $ 400 for unexpected expenses, according to the survey.

More income does not always solve all your money problems. No matter how much you earn, it is important to set your financial priorities so that you are prepared for any hurdle that comes your way.

  A notice board for the emergency room

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The importance of an emergency fund

An emergency fund just seems to be another job on your long list of financial tasks, so it is tempting to put it in to take a back seat and focus on more immediate tasks. However, if you do not set up an emergency fund, you can cost more money in the long term.

If you do not have an emergency fund and you incur unexpected costs, you have several options. First, you can charge the cost of your credit card or take out a loan to cover the costs. But if you do not have the money now, you probably will not have it in a month or two when it's time to pay your credit card or repay your loan. And the longer it takes to settle your debt, the more you will end up paying in interest. If you've paid off your debts, you might be able to pay hundreds or even thousands of dollars just as interest.

For example, suppose you had to make an emergency trip to the hospital, and you've been given a $ 1,000 bill that you debited from your credit card. Interest on this credit card is 18% and you pay $ 100 per month. At this rate, it would take about a year to settle the debt and you would end up paying around $ 100 in interest. If there are more unexpected expenses during this time, your debt will continue to rise and you will pay more interest.

Another way to pay for unexpected expenses is to withdraw the money from your pension fund. Above all, if you only need a few hundred dollars, it might look like a small amount would not diminish your savings. But it can make a bigger difference than you think.

First, you may be charged a 10% penalty if you withdraw your Retirement Benefit before the age of 59 1/2. Second, you may have to pay income taxes on the amount you withdraw so that your cash does not go as far as you think. And third, if you withdraw money from your retirement savings, it will make it harder for your savings to benefit from growing growth – and even relatively small withdrawals can impact your long-term savings.

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For example, say you have $ 10,000 in your pension fund and you deduct $ 1,000 to cover the emergency costs. Let's say you've saved $ 150 a month, which you'll still do after you've paid. If you did not withdraw any of your savings, you would save around $ 356,000 after 35 years, provided you earn an annual return of 7%. However, if you were to withdraw $ 1,000, you would have saved only about $ 345,000, while all other factors remained the same. In other words, a $ 1,000 payout can result in a potential loss of more than $ 10,000 in the long term. And if you keep withdrawing from your pension fund, it can cost even more.

How to Set Up an Emergency Fund

Regardless of how much you earn, an emergency fund is a crucial component of your financial health. But if you do not even have enough cash to cover the $ 400 spending, how are you going to build an emergency fund?

When money is tight, you need to gradually build up your savings. Most experts recommend saving enough to cover spending for three to six months if you lose your job. You do not have to spend the money overnight, but you may need to make some sacrifices so you can spend on your emergency fund each month while still paying all your bills.

Start by tracking your spending to get a clear idea of ​​how to spend your money each month. (If that sounds tedious, there are several apps that allow you to track your money and keep track of where your money is going.) If you know where to spend your money, check if there are any areas where you have cuts can make. Eliminate unnecessary costs and consider whether you can do without the pleasant costs.

If you set up an emergency fund, you should consider that these victims are temporary – once you reach your goal, your budget may return to normal. So remember, the sacrifices you have to make do not last forever.

If you have a long list of bills that you have to pay for, building a emergency fund may not seem like the most urgent task. However, you never know when an unexpected issue will appear, and an emergency fund can prepare you for financial obstacles.

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