Every investor should have an emergency fund. What is an emergency fund? Generally, this is defined as having enough liquid assets to cover three-to-six months’ worth of emergency living expenses. In case of financial emergency, access to additional money will save you from having to rely on credit cards or loans. After all, being in debt can sometimes be its own emergency.
When starting an emergency fund, here are a few tips to consider:
1. Determine what amount is best for you. Most experts agree that you should keep between three and six months’ worth of your living expenses set aside in your emergency fund. Your specific situation—whether you have children, carry substantial debt, and types of insurance coverage you have—will determine what amount is best for you. Examine your situation, your income, and your needs to decide how much you should save.
2. Start small. Starting an emergency fund can be as simple as depositing $100 every month into a savings account. Also, bear in mind that this savings account should be a separate account, unrelated to whatever you use for daily expenses. That way, you’ll be less tempted to use the money for something other than what it’s meant for.
3. Stick to a schedule. Get into the habit of making regular deposits. Whether it is weekly, bi- weekly, or monthly, create a schedule and stick to it. Once you make saving automatic, you won’t even have to think about it.
4. Use that money under the couch cushions. Whenever you find spare change, like that $1 Washington under the couch or the crinkled $10 Hamilton in that old pair of jeans, deposit that into your emergency fund instead of buying a cheap burger. You’d be amazed how quickly that adds up.
5. Allocate a portion of your tax-refund. Most people tend to treat their tax refund as a windfall for spending, but if you set aside even as little as 5 or 10% every year, you will be creating an enormous safety net for yourself.
6. Define what an “emergency” means for you. Does replacing the transmission on your car count? What about that midnight call to the plumber? Generally speaking, an emergency fund can be used for expenses that come as a surprise that might affect your health or basic needs. On the other hand, it shouldn’t ever be used for expected expenses, like buying groceries or paying for health insurance. And it should never be used for mere “wants.” Making a list now of what your emergency fund is actually for will serve you well in the future.