How to build an emergency fund

Trent over at The Simple Dollar explains what, exactly, an emergency fund is:

An emergency fund is cash that you’ve saved up for the sole purpose of helping you maintain your normal life through the emergencies that life hands you. Most of the time, you shouldn’t touch the emergency fund at all – it just sits there earning a bit of interest and waiting until you actually need it. When you lose your job. When an appliance breaks down. When your car needs a repair.

His advice is to start building a healthy emergency fund one goal at a time: start out with $250, then $500, then $1,000. After a while, you can cover whole months, like saving up a month’s worth of expenses, then two, and so on. Six to eight months of expenses is a good goal to have.

How do you get there? Trent recommends even $5 or $25 a week saved in an account you won’t touch. This is where something like a club account or money market comes in handy. Make it automatic, so you won’t be tempted to use that money for something else.

Finally, Trent recommends a bunch of ways to trim that $5 or $25 out of your budget, like eating in more or saving on utility bills.

The point is, bad things happen, and when that something does happen, you should have a healthy emergency fund (anything is better than nothing) saved up to cover those expenses.

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