How to Build an Emergency Fund

Finance, Home & Family
on November 4, 2001

Your son has just backed the car into the garageliterally. Your company is laying you off. And the roof is leaking. Unfortunately, financial emergencies are a fact of lifeand theyre the reason most financial planners recommend establishing an emergency fund to cover unexpected expenses or loss of income.

An emergency fund is enough savings to cover three to six months of living expensesrent or mortgage, food, car, and utilities. Keep the money where it can earn decent interest and where you can access it quickly without loss or penalty. Money-market fundsmutual funds made up of safe, income-producing assetsmeet both these criteria and are the best choice for most savers.

Perhaps you just dont have the resources available. Dont despair. You can build it over time by applying some of these ideas:

  • Aim for a lower savings goal initially such as a months worth of expenses. As your income rises, invest more.
  • If you have credit card debt, consolidate it at the lowest possible interest rate, stop using the card, and make the minimum monthly payment. Use your available cash to save one months living expenses, then pay off the debt. Once the debt is gone, add to your emergency fund.
  • Use bonus money such as gifts and tax refunds to build up your fund.
  • Consider an extra job. It doesnt need to be a long-term or regular commitment, but any extra income can go straight to your fund, helping establish it very quickly.
  • If you hate the idea of another regular job, put your talents to work. Do you enjoy cooking? Working on cars? Making crafts? Tutoring? Sell homemade goods, offer private lessons, or teach a class to earn income.
  • Turn spare change into an investment. Empty pocket change into a container each night, then deposit the funds at the end of the week. A couple contributing $1 each daily will collect $730 annually.
  • Sell extra items. Most people have stuff stored throughout their house that never will be used. Create cash by selling those things at a garage sale or through a consignment store.

Follow these simple steps to start building your fund today. While you cant stop the surprise financial challenges life brings, your emergency fund can help prevent a bad circumstance from becoming a disaster.