How to save for an emergency

The forecast says rain? You pack an umbrella, just in case. Car has a flat tire? Good thing you keep that spare in your trunk. But what happens if your car breaks down or you unexpectedly lose your job? Do you have a “just-in-case” fund set aside?

Probably not. More than 50% of Americans couldn’t come up with $2,000 in cash in the event of an emergency, according to the National Bureau of Economic Research and the Brookings Institution.1 Here’s help making sure you are one of the 50% who can.

Ok. So you know that having an emergency fund is important. But here are some things you might not know about saving for it.

1. How much – It is recommended that you set aside three to six months of living expenses. If you’re single and on your own but have family backup, you might be comfortable with three months of savings. However, if you have a spouse, kids, and a mortgage to support, you might sleep better with six months or even more.

2. How to come up with the cash – Think of your emergency savings fund as a bill.
Between rent or mortgage payments and contributing to a retirement fund, you already have a bunch of expenses to balance. But if you turn saving for an emergency fund into a monthly priority, you’ll get in the habit of contributing to it regularly. Inheritance or gifts. Not everyone has a wealthy great uncle, but if yours happens to leave you some money, don’t blow it all. Consider using it to start your emergency fund and invest what is left over for other savings goals.

3. Where’s the best place to stash the savings? While a traditional savings account may seem like a convenient place to keep your emergency fund, keep in mind that many earn only 0.5% in interest. Plus, you may be tempted to tap into it if it’s sitting with the rest of your money. Consider the following alternatives: Money market funds are like a savings account, money market funds tend to be a “lower-risk” place to store your cash, and generally offer better rates than your typical savings account. Shop around—many Internet banks offer even better rates than traditional banks. Certificates of deposit (CDs) they may offer even better rates than money market funds—but there is a catch. Many penalize you for taking money before the CD matures. The solution? Consider an approach called “laddering,” which means you buy a series of CDs with different maturity dates. This way, you’ll always have one ready to go if you need it.

4. Protect yourself with insurance – Besides having cash that you can access in an emergency, insurance is another way to be prepared for one. Consider these two types: Look into disability insurance. Whether you have it through work or on your own, you’ll want to know that you have enough in the event something happens. Don’t forget about health insurance if you lose your job, your health coverage goes with it. Factor in some additional money to cover the cost of health care, just in case.

Try not to use a 401(k) loan as your emergency fund. It may seem tempting to dip into it. But keep this in mind: If you quit your job, you’ll have to pay back the loan immediately, and if you don’t, you may be subject to tax and a 10% penalty. Everyone needs an emergency fund—no matter how old you are or what your income level is. And if you’re diligent about saving for it, you’ll be ready for anything—rain or shine.

Submitted by Christine Olivieri Donahue