As Eeyore might say, these days it’s always raining. With the economy turning upside down and unemployment rising, it may be a good idea to take him seriously. To keep yourself secure after a loss of income, it’s important to build a rainy day fund, or emergency cushion to get you through tough times or unexpected expense.
For most people most of the time, keeping 3-6 months’ worth of expenses in a savings, money market, or other easily accessible account is enough to see them through a short spurt of bad luck. In a good economy, that’s enough time to find a new job, relocate, or take any other necessary steps to reverse a financial crisis. These days, it’s harder to do any of those things, so you should think about keeping at least 6-9 months as an emergency fund. If you have a lot of debt or are the sole supporter of your household, try to keep close to a year’s worth of expenses tucked away.
If you’re starting from scratch, saving even three months’ worth of expenses can be daunting. Take it slow, but start the process. Set up a separate account to hold your emergency fund. If you mingle it with your other money, it’s easy to spend it on non-emergencies (and a really great pair of shoes on sale does NOT count as an emergency!). Once it’s open, set that new account to automatically withdraw money from your checking account on a regular basis. Then you don’t even have to think about it; just sit back and let your emergency fund grow. Talk to your payroll department at work, too. Many companies allow you to split a direct deposited paycheck into multiple accounts. If you really want to be sure that you save for that unexpected event (think car meets telephone pole), you can divert part of your paycheck every month, before it even hits your bank account!
If you have debt, consider saving about three months of expenses and then split any available cash between plumping up that emergency cushion and paying down your debt. That way if Eeyore turns out to be right, you won’t be caught in the rain without an umbrella.