Quiz: Do you know how to Create an Emergency Fund?

Staff

4 Min Quiz

Which of these would qualify as an emergency worth dipping into your emergency fund for?

The main criterion for determining whether to use your emergency fund should be if the expense is a necessity or just something you want.

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What financial device do some critics say makes an emergency fund obsolete?

A home equity line of credit may allow you to write checks immediately to cover emergency expenses. They may, however, come with added fees. And if you don't own a home, this type of credit is unavailable to you.

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How much money should you have in an emergency account?

The idea of an emergency fund is to help you get by for a short time in the event that you lose your income or need extra cash. Three months' worth of living expenses is the recommended amount.

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Which of the following should you NOT count on when calculating your emergency costs?

Though insurance may cover certain costs you might incur in an emergency, you will almost certainly have increased expenses during such a time. And, you should make sure you pay for food and shelter before other expenses.

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What should you do if you want to set up a large emergency fund?

Especially if you are putting a larger sum in this fund, make sure you at least earn a return on the investment of this money, rather than letting it just sit around. Also, don't put your money in any form that you could not easily access during an emergency situation.

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What is a helpful tool for starting an emergency fund?

By having a set amount automatically taken out of your paycheck each month for the emergency fund, you will not even notice that any money is gone.

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What type of account should you use for your emergency fund?

Ideally you should use an account that is not overly easy to access, but one that still has the liquidity you need.

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What is the risk of trying to build your emergency fund too quickly?

By depositing a lot each month, you may have to give up on enjoying your life. This could backfire by discouraging you enough that you stop contributing to the account.

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Why should you pay off a credit card before building an emergency fund?

You probably pay 12 percent interest or more on your credit card, and chances are slim to none that you'll make anything close to that percentage on your emergency fund's money market account.

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Why do some people argue that you should not defer 401(k) payments to build an emergency fund?

Since a 401(k) fund gains interest for many years before you access it, the same amount of money can have a sizable long-term impact on your finances.

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About This Quiz

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.

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