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Health & Fitness

How to Build an Emergency Fund

How to Build An Emergency Fund

Submitted by Brennan Purdy, State Farm Agent

Most financial experts recommend having enough money set aside in an emergency fund to cover your expenses for at least three to six months. Saving regularly to accumulate that much money may seem like a daunting task, especially with all of your other financial obligations.

Not sure how to get started? If you're able, you can always kick-start your emergency fund with your tax refund, a work bonus or a cash gift.

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If that's not a possibility, you'll need to strategize a savings plan.

Determine How Much Money You Need
But first figure out how much money your emergency fund should contain. The easiest way to determine this is by taking a hard look at your monthly expenses. Common monthly expenses include:

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  • Housing, such as mortgage, rent and association fees
  • Utilities, including gas, electric and water
  • Telephone, cable and Internet
  • Food, including groceries, coffee and dining out
  • Transportation, including car, or lease payments and fuel, or public transportation fees
  • Health insurance premiums and prescriptions
  • Other insurance premiums
  • Health club memberships
  • Retirement and other savings contributions
  • Debt repayment

Be both accurate and realistic while keeping in mind that how much you spend during good times can usually be pared down when money is tighter. Luxuries like cable television, gourmet coffee and dining out are all items that can be reduced or even eliminated from your budget during challenging times. In fact, trimming these indulgences can also be a good place to start if you're not sure where you'll find extra money to save.

Set Up A Separate, Liquid Account
Next, find a place where your emergency savings fund will be accessible - but not too accessible. Accumulating and maintaining your emergency fund can be difficult, even more so if you're easily able and constantly tempted to dip into it for non-emergency circumstances. For this reason, your checking or savings account probably isn't the best place to stash your emergency fund. But, you can open an additional account with your bank, or at another bank in your area that isn't conveniently located.

Regardless of where you keep your money, save it in an account that's liquid, that is, one that is easily convertible to cash, such as a savings or money market account.

Since even the high-yield versions of these accounts have lower rates compared to other savings vehicles, they may seem like an unwise place to store your emergency fund. But remember, your goal with this money isn't to make more money. An emergency fund isn't an investment with growth you'll need to depend on, like a retirement savings fund: such investments aren't often easily accessible without paying penalties. Since you'll need to withdraw money from an emergency fund when you least expect it, you'll want to be able to do so consequence free. Of course, once your emergency fund contains more than a few months of expenses, you can consider an alternative, such as a certificate of deposit with a high annual percentage yield. Just make sure that you choose a short-term CD, and leave enough money in a liquid account so you don't defeat your efforts.

Make Your Emergency Fund A Saving Priority
Finally, start saving! As in other types of saving, the key to building your emergency fund is to pay yourself first. But given the importance of an emergency fund, you may want to make it the top item on your savings agenda - even forgoing or reducing other saving until your fund is built up. At that time, you can resume your other savings plans.

As with any saving, it's important to start somewhere - even if it's somewhere small. You may want to set an initial goal, like $1,000, that's achievable in just a few months. Or begin with a minor amount that you increase incrementally. Your strategy may be to save only $20 a week until you reach a point when you don't notice the income missing, then raise the amount.

Most importantly: Don't touch your emergency fund unless a financial emergency presents itself. When that time comes, you'll be thankful you didn't.

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