Building an Emergency Fund

Situation

I have read that everyone should have money set aside for emergencies. How large should that fund be and how do I do it?

Suggestion
Having some money set aside for the unforeseen expenses is good common sense. Unexpected things can happen, like losing your job, a major illness, a large repair to your home or needing to replace your car.

Step One - How large of an emergency fund should I have?
An old rule of thumb was that you should have enough money set aside to cover three to six months of living expenses. With more economic uncertainty, some are now recommending that six to nine months of living expenses is more appropriate.

Start by determining your current living expenses, making sure to include housing, debt payments and insurance. Next, decide how many months' expenses you want to have in your emergency fund. You may want to start with a goal of six months' expenses and then decide whether you want to save even more.

Step Two - How much do I need to set aside each month to reach my goal?

Use this calculator to learn how much you need to save each month to build your emergency fund.

Step Three - How do I save the money?
An easy way is to start an automatic savings plan at your financial institution. You simply instruct them to transfer a specific amount from your checking account to a savings account each month. You can also use a similar type program to have an amount automatically deducted from your paycheck and deposited into the savings account.

An automatic saving plan is a great way to develop the habit of saving. You will come to view that amount as a regular "expense" and may not even notice it is gone from your checking account. Over time, it will add up and that account will probably pay a higher interest rate than your checking account.

Summary
Building an emergency fund requires a few decisions and a little self-discipline. It may take some effort, but having that emergency fund can help prepare you for the unexpected. If you don't end up needing the funds, you will be on your way to accumulating some wealth and have a little more financial peace of mind.