Financial prudence dictates that we stash away enough cash to cover living expenses for three to six months in case something catastrophic comes our way—a job loss, an unexpected illness or an unpredicted home expense.
Some items that also should be covered in such a fund include health and car insurance deductibles, rent or mortgage, food, energy bills, and phone bills. Get your rainy-day fund started by doing the following:
- Aim low if you can’t amass the recommended cash. If you’re burdened with debt and your income is low, you can still set up a decent emergency fund. Aim for one that will cover at least one month of expenses. A cash reserve should be a priority—even over your 401(k) contributions.
- Consolidate debt. Now stop using the credit card. Make the minimum monthly payment so you can build up savings for one month of living expenses. After you’ve done that, then you can turn your attention to other goals, such as retirement savings and paying down debt.
- Steer clear of the stock market. You’ll want to put your emergency money in a place where you can easily get your hands on it. The two best options are a savings account at a credit union, or a money-market mutual fund. Note: Although a money-market fund isn’t federally insured, it typically has higher interest rates than a savings account.