Quiz: Do you know how to Create an Emergency Fund?
After you design and learn to stick with a monthly budget, an important next step toward financial health is setting up a solid emergency fund. Such accounts help people survive in the event of a job loss, illness, natural disaster or other emergency.
Which of these would qualify as an emergency worth dipping into your emergency fund for?
major car repair
What financial device do some critics say makes an emergency fund obsolete?
home equity line of credit
high-limit credit cards
How much money should you have in an emergency account?
three months' living expenses
a quarter of your annual salary
five times the amount you spend on food each month
Which of the following should you NOT count on when calculating your emergency costs?
You will probably spend more than you normally do.
Insurance will cover you completely.
Food and shelter will likely be your biggest expenses.
What should you do if you want to set up a large emergency fund?
Put your money in an interest-bearing account.
Put your money in a high-yield mutual fund.
Put your money in certificates of deposit and savings bonds.
What is a helpful tool for starting an emergency fund?
an automatic deduction
direct deposit of your paycheck
What type of account should you use for your emergency fund?
money market account
ordinary savings account
What is the risk of trying to build your emergency fund too quickly?
You might get discouraged.
You can create a financial emergency by skimping too much.
It may be hard to find the right account to accept a large deposit.
Why should you pay off a credit card before building an emergency fund?
because you will pay a higher rate on credit card interest than you will receive from your emergency fund account
to prevent yourself from getting discouraged
to use the available credit on your card as part of the emergency fund
Why do some people argue that you should not defer 401(k) payments to build an emergency fund?
because the long-term losses you will have outweigh the benefits of having an emergency fund
because you can take a loan from your 401(k) fund in an emergency
because emergency funds are subject to double taxation