Your first budget priority should be to set aside money in an emergency savings 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 if your old one dies suddenly—without going into debt. Keep this money in a separate savings account from your general savings.
Set a goal of having three months’ living expenses in your emergency fund. If it is not realistic to set aside this amount within your budget, try to build it up to at least a few hundred dollars and add to it whenever possible.
Keep the following points in mind when building an emergency savings 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 bank certificate of deposit (CD) or a stock mutual fund. If you cash these out early, you may lose interest and some of the original investment.
- Use the money only for true emergencies, such as unexpected medical bills. If you lose your job, you may need to tap your emergency fund to purchase food, pay for utilities, make mortgage payments or pay the rent, and cover necessary transportation costs.
Fill out the Emergency Fund Worksheet and calculate how much you should save for three months’ worth of basic expenses.