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How To Make An Emergency Fund

The first question about the emergency fund is, what is it for? Well, think about it. If you lose your job… or, hey, I don’t know, maybe it’s a global pandemic or a recession… you’re going to find that even though you don’t have any income, you still have expenses. And you can’t pay for your groceries with an asset. So you need some cash squirreled away. Do it now. But how? Here’s how in three easy steps

The Right Amount

Well, a good rule of thumb is to have three to six months of living expenses readily accessible. I say three months only if you have a steady job and a steady paystub. If your work is a little less consistent, like if you’re a bartender or a freelancer, I strongly suggest that you tuck away six months of whatever money you need to live on. If you work mostly on commission, like real estate brokers or salespeople, a year is probably a better number for you. Now, figure out how much of a nest egg you need for your emergency fund, and how long it will take you to reach that dollar amount if you put 15% of what you make every month toward that fund.

Where to Put Your Emergency Fund

First look at the different places you can get savings accounts and see which one you feel comfortable with. The biggies are: credit unions, regular banks, and online banks. Double-check to make sure they’re insured. In case something happens to the bank, you want to make sure your money is safe. Then open the account. And don’t sign up for overdraft protection! By law, you now have to opt in if you want to have the bank cover an overdraft charge when you don’t have money in your account to pay for your purchase—and then, of course, they charge you a fee. Don’t do this. If you don’t have the money, you’ll likely not have enough to pay the fee. Even if you do, the principle of overdraft protection doesn’t sit well with me. It’s basically a quickie loan to you in exchange for an exorbitant fee.

Don’t Delay

I know all this ‘saving for a rainy day’ stuff is a drag. And none of us want to plan for an emergency, because we want to live in a world where shit never goes wrong. But let’s say you look outside, see the sun shining, and decide, “To heck with being safe. I’m leaving my umbrella at home!” You risk getting caught in the rain. And when it rains, it pours. Get on top of your emergency fund. This last step is just about doing. You’ve filed away three to six months of expenses and opened up your account. Easy.

As with the pandemic or the fires in California or the freak winter storm in Texas, we’ve seen how quickly situations can change. Emergencies happen in an instant and you need an emergency fund. It sounds like a drag, but make it easy on yourself! When you’re building your emergency fund, automate the process as much as possible. In your handy dandy new savings account, you can auto-deposit from your checking account into your savings account every time you get paid. With the process on auto-pilot, you’ll have your emergency fund before you know it!

A version of this article was originally published on Forbes.

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