Setting up an Emergency Fund
It’s an unpleasant thought, but a financial crisis could strike when you least expect it, so you’ll want to be prepared. Protect yourself by setting up a cash reserve so you have funds available in the event you’re confronted with an unexpected expense. Otherwise you may need to use money that you have earmarked for another purpose–such as a down payment on a home–or go into debt.
You may be familiar with advice that you should have three to six months’ worth of living expenses in your cash reserve. In reality, though, the amount you should save depends on your particular circumstances. Consider factors like job security, health, income, and debts owed when deciding how much money should be in your cash reserve. A good way to accumulate emergency funds is to earmark a percentage of your paycheck each pay period. When you reach your goal, don’t stop adding money–the more you have saved, the better off you’ll be.
Review your cash reserve either annually or when your financial situation changes. Major milestones like a new baby or homeownership will likely require some adjustments.
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