Before we get to the tips, most people agree that building an emergency stash of cash that can last long enough to cover three to six months should be one of the first financial priorities, even for those in debt. This can be difficult to achieve. Bach says the average American has less than one month’s worth of expenses set aside.
Here are some tips for getting to the three to six months point:
* Make it automatic. Every time you get paid, a portion should be automatically transferred to your savings account. This is even easier if you have Direct Deposit. If you don’t have this set up yet, just call your bank to get started. At this point, I automatically deposit 5% of my paycheck into a fund for emergency savings, in addition other amounts for other savings goals.
* No checking accounts. Your emergency fund should not sit in a checking account where it can be easily accessed by checks, debit cards, and ATMs. You shouldn’t be able to dip into the fund whenever you feel like. If you do, it’s not really an emergency fund.
* Put it in the right place. Bach suggests a money market account instead of a savings account. There is really no difference unless you’re looking at a “money market fund.” Money market accounts are insured by the FDIC and have no discernable differences from savings accounts. In fact, many banks that offer money market accounts call them savings accounts. The point is to find a cash account that offers significant interest. Here’s a handy guide to the best savings account interest rates.
* Decide how big a cushion you need. As I mentioned above, the typical emergency fund should be three to six months’ expenses. In order to determine what your number is, you have to know what your expenses are. You might have to track your spending for a few months before you have an idea of how much you are really spending. Get help from Quicken or Microsoft Money
Take a look at some of the other blog entries I’ve written on this topic, listed below.
Updated February 6, 2012 and originally published August 29, 2006.