Building an emergency fund

The first priority for your savings should be to set aside money in an emergency fund. This money will allow you to pay for an unexpected expense—such as a medical bill, a large car repair, or a new computer—without going into debt.

A good goal for the amount of money to have in your emergency fund is three months of living expenses. If it is not realistic to set aside this amount within your budget, try to set aside a few hundred dollars.

This money should be kept in a separate savings account from your general savings. If you mix your emergency fund with your general savings, it’s just too easy to dip into it.

Using savings to handle an emergency is better than taking out a loan or cashing in investments. If you take out a loan, you will have to pay interest. If you cash in an investment, you may lose interest and some of the original investment.

Remember these points when building an emergency fund:

• Try to set aside enough to cover your basic living expenses for at least three months.
• Keep the money in an easily accessible savings account or money market account.
• Do not keep the money in a long-term investment asset, such as a stock mutual fund.
• Use the money only for true emergencies, such as unexpected medical bills. If you lose your job, you may need your emergency fund for food, utilities, mortgage payments or rent, and necessary transportation.

The Emergency Fund Worksheet can help you calculate how much you should save for three months of basic expenses.