3 Simple Steps
By: Selena Maranjian
Are you paying your bills as they come in, and not charging more than you can afford? Excellent. Are you socking away money regularly for retirement, perhaps via a 401(k) plan at work? Good. Have you put a hefty sum of money away as an emergency fund? No? Well, that is a problem — but it’s not an insurmountable one. Take a deep breath and keep reading. Here are a three steps you can take right away to turn that situation around.
1. Understand the concept
First off, let’s define our terms. Unless you’re independently wealthy, it’s smart to have a dedicated emergency fund ready in case disaster strikes. You might lose your job, for example, or experience a costly health crisis. It’s easy not to think about these kinds of events, assuming they won’t happen to you, but they do happen to some people, and they can wreak financial havoc. (Even a big car repair can throw your finances out of whack if you’re not prepared.)
How much money are we talking about? Well, a common recommendation is to have three to six months’ worth of living expenses socked away. Notice that there’s no one-size-fits-all sum, and even the three-to-six-months rule is rough. If it’s easy for you to land a new job whenever you need one, then you might not need to save as much — particularly if you’re in a two-income household. (But imagine a scenario in which one of you is stricken, and the other has to become a caretaker — both income streams could suffer.) If it takes you a long time to find work, though, or you’re just very risk-averse, consider saving even more, such as a year’s worth of necessary expenses — including food, housing, utilities, insurance, and all your other nonnegotiable costs of living.
2. Start saving, and invest sensibly
Once you start accumulating funds for your emergency account, be sure to keep those dollars in the right place. The stock market, for example, is not appropriate, as it could drop sharply just before you need to withdraw money, leaving you with shrunken assets.
Meanwhile, a 3-year or 5-year CD isn’t ideal, either, as it locks up your money and charges a penalty for early withdrawals. Bank accounts or money-market funds are generally good options, though they offer paltry interest rates these days.
One possibility is to keep part of your emergency fund in low-growth safe spots,while investing another portion elsewhere. The safer portion can buy you time while your CD matures, or in a worst-case scenario, you’ll pay a penalty but will be able to tap a sizable sum. (Some CDs have no early-out penalty.) You might also opt for some relatively stable dividend-heavy stocks for a portion of your fund.
3. Be creative
Finally, consider “outside the box” methods to help you fund your emergency savings. Sure, you might take on a second job in order to generate more cash quickly. But you could also hold a garage sale, tighten your budget by cutting out discretionary items, or cancel your gym membership and take up walking or running instead. Spend a little time shopping around for the best deal on your home insurance and car insurance, and you might surprise yourself by saving several hundred dollars. You might immediately park your tax refunds in your emergency fund, too.
If you’re without an emergency fund but you’re healthy and employed, you’re still in a great position to build a fund and be prepared for whatever twists and turns life sends your way.