How to Create an Emergency Fund



The Budget Fashionista’s Annual “Being Broke Ain’t Cute” Series features tips and advice to help you improve your personal financial health. For more personal finance information, please visit our Financial Health Series.

You probably know all about saving money.  What self-respecting budget fashionista doesn’t pride herself in knowing how to find the best deals everywhere?  When you think about saving money, you should think beyond sales and deals . . . you should think about saving some money for a rainy day.  What happens if you lose your job and don’t have any money stashed away? Sure, you can whip out your credit cards and maybe live off those for a little while, but wouldn’t it be better to have the money you need already sitting in an account somewhere?

How to Create an Emergency Fund

1.   Stash away enough money to keep you afloat for a few months.  In a perfect world you should have about six months worth of expenses in a savings account to tide you over if you suddenly don’t have an income, your car explodes, or you break your legs toppling off some fierce heels you found on a clearance rack.  Whatever the cause, you want to have some money you can grab so your financial emergency doesn’t evolve into a financial catastrophe.

2.   Put your money somewhere you can get to it. Don’t put your emergency money into an investment account because you might have trouble getting your hands on it when you need it.  Imagine this: Your car needs repairs pronto, so you call your financial advisor who makes you sign about a million forms and doesn’t send you the money for a few days.  Wouldn’t it be better to have the money sitting in an account that you can just waltz into the bank and make a withdrawal? Keep your money where you can get it when you need it.

3.   Make money while you save money.  Don’t plop your emergency money into an account that doesn’t pay you any interest.  Even though you aren’t going to touch the money unless you really need it, you should still make a little bit of money off it from the bank.  Check out a money market account; they usually have decent interest rates and sometimes you can get a higher interest rate when your balance gets bigger.

Once you get your emergency account set up, leave it alone! You never know when you might need it, so it’s better to not tempt fate by messing with your safety net.

photo by s2pohto