Importance of Emergency Funds
In my opinion, short-term savings is more important than long-term savings. Every household should have three to six months’ living expenses saved for emergencies and unexpected events.
When you look at what to do with extra money in your budget, there are three steps to follow:
- First, pay off short-term debt, such as credit cards and car loans.
- Secondly, put three to six months’ living expenses into a savings account. This money will be available to be used for things like major car repairs, a new air conditioner for your home, a medical emergency or a job loss. Unexpected events happen to all of us, and you will have tremendous peace of mind to have emergency money set aside.
- Third, save for the long-term. Long-term savings can be used for retirement, children’s education, or a second home.
Financial maturity is being able to give up today’s desires for future benefits. A good example is saving for retirement in your company’s 401(k). You put money into your account regularly when you could have spent this money on something for today. With the magic of compounding working for you, if you save $1000 a year, starting at age 25, with an average return of 12.5%, you will have $1,000,000 when you retire. In other words, you have given up $40,000 of short-term gratification for $1,000,000 for retirement.
“Live self-controlled, upright and godly lives in this present age, while we wait for the blessed hope--the glorious appearing of our great God and Savior, Jesus Christ.” (NIV)
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