by Christina Pomoni

Created on: January 16, 2011

Today’s tough economic climate can alter your life in the blink of an eye. Financial crisis can hit on your door in all shapes and sizes taking the form of a job loss, home or car repair, huge medical bills and so on. How many times have you gone to your bank only to discover that your account didn’t feel as comfortable as it did one or two weeks ago? If this is your case and you don’t (rightly) feel like getting another loan or further loading your credit card, you should consider the option of setting money aside in an emergency fund.

Why an emergency fund is important?

1) You avoid liquidating your 401k

An emergency fund helps you meet your financial obligations. Nowadays, the majority of Americans borrows from the IRA accounts or withdraws money from the 401k funds to anticipate any financial emergency. The paradox is that, although the 401k is a retirement plan and not a savings account, the government allows workers to borrow from their 401k plans. However, liquidating your 401k should be your last option because liquidating is subject to severe taxation and penalties. If you liquidate before the age of 59 ½, the retirement funds are subject to taxation and 10 percent penalty payment. So, it is better to set up an emergency fund than burdening yourself with additional charges in your already difficult financial situation.

2) You avoid overcharging your credit cards

In case of a financial emergency, most people turn to their credit cards. It is very tempting and extremely convenient to charge $2,000 on your credit card, especially when you have no other option. However, this never-ending spiral of credit card charging leads to high interest rates and a huge debt for which, sooner or later, you will need to find a suitable debt consolidation solution. On the contrary, if you have an emergency fund, you can withdraw money from there and avoid overcharging your credit card.

How much money should you set aside in an emergency fund?

Most financial experts suggest that setting three to six months worth of your living expenses aside in an emergency fund can provide you with the essentials to anticipate a financial emergency. For instance, three to six months of saved expenses normally cover up for a loss of job until you find new employment. Of course, it also depends on your marital status, how many people are there in your family, how much debt you carry and how much money you need to anticipate the unexpected financial crisis. In

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