Wednesday, January 14, 2009

One Thing You Can Do to Make a Huge Impact on Your Finances

Most of us are not wealthy. The majority of America, and the world for that matter, does not live in mansions, does not have $100,000 cars, does not have a staff of butlers and maids to wait on them, and does not have at least a few million dollars sitting in the bank. As much as many of us would love to have comfort and luxury that comes from riches and large amounts of money, we don't.

Many of us live modest lives. We go to work, get our meager paycheck, pay the bills, and go on with life. Those with modest lives and frugal lives alike fall into financial hardships. Once in a while we get an unexpected expense that may force us to borrow money from a family member, or put it on a high interest credit card. This can lead to debt from the interest on the card, or it can cause riffs with family if it is not paid back quickly.

Ideally, we would save and save and be able to afford everything, but when an unexpected expense puts us in the hole, it's hard to get back out. There is one thing that can make a huge impact on your finances. By doing this you can avoid debt before it ever happens. You can ease many of your stresses and worries about money.

This will not solve all your money problems. If you can't pay your bills, this isn't the magic bullet that will pay them all for you. If you are a shopaholic, this won't cure you. But for the average person who just gets by as well as the people who do well but aren't rich, you need to be doing this to finance your financial security.

You need to build an emergency fund. An emergency fund is a set aside savings for times of emergency. An emergency can be a broken down car, a sudden doctor visit, a lost job, or any other type of financial emergency. For most when this happen, they immediately put it on their credit card. This causes them debt because that money is an unaccounted for expense that immediately grows and accrues interest. If there was an emergency fund, one could easily pay for it and not have to worry.

You should build an emergency fund of at least 3 preferably 6 months of living expense. For example, if you spend $3,000 a month for everything, you should save between $9,000 and $18,000. This way, if you lose your job, you will have 3 to 6 months to find another. If you are able to collect unemployment, this gives you extra cushion. You do not need to save this all now. Set aside a small amount until you have it all saved. Even if it takes you 3 years to save it all, you will be happy you did when a problem arises.

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