I’m sure that you’ve heard this before, but it bears repeating… When you’re getting your financial house in order, the first step should be to build up an emergency fund. The purpose of this fund is to allow you to navigate rough patches in your life without completely derailing your finances. Just be sure that you reserve it for true emergencies.
How large should your emergency fund be?
The ideal size of an emergency fund depends in large part on individual circumstances. Most suggestions range from three to six months of living expenses, although some experts are comfortable with less, whereas others recommend more. Yet others suggest a tiered approach, wherein you initially set aside $1,000 and then build up to 3-6 months of expenses once you eliminate your debts.
Of course, these sorts of recommendations assume that you have a basic idea of your living expenses. Assuming that you do, you just have to set aside the prescribed amount. Easy enough. Right? Well…
How should you go about building up an emergency fund?
Unfortunately, it’s not always as simple as dusting off your monthly budget, multiplying by three (or six, or whatever multiple you’re most comfortable with) and then sticking a bunch of money in the bank. In the vast majority of cases, it’ll take some time to come up with the necessary funds.
As with anything, the most important step is to just get started. While it may take longer than you’d like to build up your emergency fund, it’ll never happen if you don’t take that first step. If you can only afford to trim $50-100/month from your budget, that’s fine. Build it into your budget, and start transferring the money to a dedicated account at your favorite bank.
Another great strategy is to direct any windfalls that you receive into your emergency fund until it’s fully funded. Along these lines, perhaps the most timely advice would be to use your tax refund and/or your tax stimulus rebate check as the basis of an emergency fund — tomorrow is Tax Day, after all!