Ben
Franklin once declared, “A penny saved is a penny earned.” Yet, equally
enlightening are his thoughts on expenses: “Beware of little expenses. A small
leak will sink a great ship.”
And
there are plenty of “leaks” that can scuttle an already-tight budget. For
instance, a spouse idled by the sour economy, a fender bender with the family
car, or an unexpected hospitalization. That’s why financial advisors recommend
that you have a rainy-day fund—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 relying on credit cards or loans
that simply compound the problem.
When
starting an emergency fund, here are a few tips to abide by:
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 into your high-interest savings account. But before
you begin, be sure that you’re meeting your basic living expenses. And as you
build your emergency fund, be sure you’re also reducing your spending and
avoiding debt.
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. Consider an online savings account. In many cases,
an “online” savings account may make more sense than an account at a
traditional, bricks-and-mortar bank. That’s because many traditional banks are
not currently offering a savings option with interest rates high enough to
meaningfully beat inflation. In addition, an online savings account is a
reliable way to manage your money.
