Starting an Emergency Fund: The Basics
How it works: An emergency fund is a stash of money that you can easily access to cover unexpected expenses that aren't in your budget. This fund should be liquid, rather than tied up in the stock market, real estate or other investments. Most financial experts recommend having four to seven months' worth of expenses available in an emergency fund in case of a job loss or other personal crisis.
Who's eligible: Anyone can build an emergency fund; it just takes discipline and cash. Set aside even a small amount to start your fund and build from there.
Why? You never know when you'll face unexpected expenses, such as appliances that stop working, a layoff, a long illness or an accident. Having ample cash available and accessible can help you get through tough times.
Why not? There's no good reason to avoid setting up an emergency fund, but you should be choosy about where you put it. Keeping it in your regular bank (especially in your checking account) may make the fund too accessible, and you may be tempted to use the money for non-emergencies. Consider Treasury bonds, short-term Certificates of Deposit (CDs), money market accounts or savings accounts at an online bank or a different bank or credit union from the one you normally use.
Playing catch-up: Accrue savings quickly by setting up a monthly direct deposit from your paycheck into your emergency fund. To ratchet up the savings, go for savings vehicles that are accessible but earn more interest than a regular savings account, such as a money market account or a short-term CD.