What would it be like to have a pot of money available when you have an unexpected expense? I used to think that unexpected expenses was something that happened very rarely. But it seems like these days I have as many unexpected expenses as I do regular bills. One of the vehicles is always needing tires or repairs, the washing machine needs replaced or buying a new water heater (like I did just last week). That is where the Crisis Fund comes in.

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If you have a budget in place, most of your regular paycheck is already allocated for something. Ideally about 10% should be put aside for savings. It would be a good idea to use about half of your savings for long term savings and half for your crisis fund. Your long term savings would be used for large purchases like a home or money for college for the kids while a crisis fund would be used smaller purchases.

Your long term savings can be invested in many ways to yield the best interest rate you can find since the money is intended to be tied up for years. Your crisis fund needs to be in a savings account or a checking account that earns interest to make the money available on short notice.

You may even want to use your crisis fund for bills or expenses that you know will be due in the future. A few examples of this could be school clothes for the kids, insurance payments that are due every three, six or twelve months or even a balloon payment on your mortgage.

One of the major reasons to have a crisis fund is to prevent the use of credit cards. All of the purchases you would make with a credit card could be made out of your crisis fund. With the average credit card interest being 18% or more, just having the cash available could save you hundreds of dollars a year.

If you don't think you have money for a savings of any kind you might want to think about ways of cutting back on something else to create a crisis fund. If money is extremely tight, you will probably have to put off starting a long term savings.

Even putting $5 or $10 a payday away will help when you need it.