Bills.com Outlines How and Why to Start an Emergency Fund

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Tax refunds, government economic stimulus checks offer opportunity to build financial cushion.

Surveys indicate that nearly 75 percent of Americans plan to use their forthcoming economic stimulus checks either to pay down debt or for savings. Brad Stroh, co-founder and co-CEO of free online consumer finance portal Bills.com (http://www.bills.com) believes Americans also can seize this opportunity to create or build an emergency fund -- and here's why.

"During the past three years, the U.S. savings rate has not exceeded 1 percent of personal disposable income," Stroh said. "Today, that might be changing, if enough people get into a savings mindset. Building an emergency fund can seem intimidating, but it is a crucial element of a good financial plan."

An emergency fund can be useful in a range of situations, Stroh said, such as these:

  • The windshield cracks and begins leaking. Replacement cost: $500. Cost with minimum payments on a credit card at 18 percent: $799 (including interest) over six years.
  • A child falls and needs stitches. Emergency room cost: $1,200. Cost with minimum payments on a credit card at 18 percent: $2,199 (including interest) over 11 years.
  • The furnace dies. Replacement cost: $2,000. Cost with minimum payments on a credit card at 18 percent: $3,800 (including interest) over nearly 14 years.
  • A worker is jobless for three months. Living expenses: $3,300 per month (U.S. median budget), $9,900 total. U.S. average unemployment benefit of less than $250 per week leaves the worker $6,900 short. Cost with minimum payments on a credit card at 18 percent: $13,599 (including interest) over nearly 21 years.

"Clearly, 21 years would be a long time to pay off a short period of joblessness," Stroh said. "An emergency fund allows you to prepare for these types of situations, so that you need only pay for a problem once and then forget it -- except to repay yourself."

Here are Stroh's guidelines on how to take action to build an emergency fund:

1. Pay debt first. For those who are weighed down with debt and paying interest rates of 18 percent, 30 percent, or even more on those debts, it does not make sense to keep cash in a low-interest earning account. Do pay off consumer debt first. Paying more than the minimum on credit cards and other debt is a way of creating a financial cushion.

2. How much is enough? "Enough" depends on a person's individual situation. "Think about the level of expense that causes you to rush to a credit card," Stroh suggested. "Is it a car repair bill for $250? A medical bill for $500? Have at least that amount available, and build toward six to nine months' living expenses."

3. Pay yourself back. If you have to spend the emergency money, pay yourself back, Stroh said: "Cut costs wherever you can to replace your savings." However, always continue making at least minimum payments on debt.

4. Build a real emergency fund. Building an emergency fund of six to nine months' living expenses might take one or more years. Start now - knowing it is there will give you many restful days and nights.

5. Keep it safe. Emergency fund money should be kept somewhere safe and where it is easy to access. It should not be in stocks or other investments that might lose value. "Good options might be in a money market fund or rolling certificates of deposit (CDs)," Stroh said. "Your money will be earning interest, you'll be unable to spend it without forethought."

"Whatever amount you choose, knowing you are on the road to financial security will be worth a bundle in rocky economic times," Stroh added. "For those who will have a tax refund or economic stimulus check coming soon, think about it -- it could make a great way to ensure 2008 is the year you start your emergency fund."

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at http://www.bills.com/blog. Since 2002, Bills.com has served more than 30,000 customers nationwide while managing more than $1 billion in consumer debt. Bills.com is a division of Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young's Entrepreneur of the Year Awards.

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Aimee Bennett
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