Emergency,Fund,amp,#58,Your,Fi finance, share, loan An Emergency Fund: Your First Line Of Defense

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Downsizing, rightsizing, forced retirement, layoffs,firings, outsourcing, and being made redundant.All could mean the same thing to you: financial catastrophe.No, you may not have to declare bankruptcy or move back inwith your parents, but losing your job could put a big dentin your financial goals and even set you back several years.You may need to live on your savings or liquidate some ofyour investments.If you have no savings or investments you may have to relyon credit cards and could rack up significant credit carddebt. Then when you find a new job, your expenses may haveincreased because of the additional credit card payments.And the job you eventually find may not pay as much as theone you lost. So you are now forced to live on less whileyour expenses have either continued at the same level oreven gone up.Studies show that the average worker will have six careerchanges in his or her lifetime. Not just job changes, butcareer changes.So how can you prepare for your own financial "downtime"?An emergency fund.An emergency fund is really just savings. But it is notsavings for a particular item or even an investment for yourfuture or your retirement. It is your "rainy-day" fund.But unlike insurance where once you pay your premium, themoney is out of your hands, your emergency fund is yours tokeep.So how much do you need? How can you build your emergencyfund? And where should you keep the money?The easiest way to figure out how large your emergency fundshould be is to take your current income and multiply it bythe number of months you could be out of work. If you make$3,000 each month and you want to be prepared for a 6 month"vacation", you will need $18,000.But obviously saving $18,000 will take some time. Howquickly you want to build your emergency fund depends on howconcerned you may be about your current and futureemployment prospects.Saving $100 each month will take you 180 months or 15 years.Saving more each month means you will be protected sooner.Also consider that during the next 15 years your income mayincrease and your expenses usually rise to match yourincome.Also consider inflation. (If you own your home, your housepayment may not rise. If you are renting, your rentprobably will.) The cost of food, utilities and taxes alsorise over the years. At a 3% inflation rate after 15 yearsyour $18,000 will only buy $11,400 worth of goods.A good rule of thumb for saving is to try to save enougheach year to supply you with one month's income. This meansyou are saving 1/12 or 8.3% of your monthly income.This will allow you to build your emergency fund by onemonth every year. After only six years you will have asix-month supply of emergency cash. Then you can continueto extend your "coverage-period" or you can divert themonthly payment into other savings or investments.Most people find that "billing" themselves for savings andinvestments is a good way to put your savings on auto-pilot.If an amount is taken automatically from your bank accounteach month, it is easier to handle than if you wait untilthe end of the month and try to save from what you have leftover. (How often do you have anything left over?)So where is the best place to keep your emergency fund?Probably not a place where you can have easy access to it -too tempting. Definitely not as cash in the cookie jar -too unsafe (and no interest). And probably not in 5 yearCDs - too restrictive. You may want to avoid CDs altogetherso that you are not charged an early withdrawal penalty whenyou can least afford it.Savings accounts are OK, but usually pay very littleinterest. If a savings account is your choice, open one ata bank that you don't regularly use. Also don't get achecking account to avoid the temptation to spend "just alittle" bit here and there.Or look for a money market account that pays a reasonableinterest rate. You may want to consider a money marketaccount that only invests in tax-free securities. This wayyou won't have to worry about paying taxes on your interest.Then set up an auto-withdrawal from your regular checkingaccount or direct deposit amount from your pay check rightinto this new account. Adjust your budget to accommodatehaving less money each month and forget about it.You can also give your emergency fund a boost now and thenby putting "windfall" money into to it. You know"free-money"; birthday gifts, inheritances, insurancesettlements, escrow overages, rebates, tax refunds, etc.Your emergency fund becomes your own financial insurancepolicy. And if you never use it you will have that muchmore money to play with when you retire. Or even retireearly with the extra money you have saved. Article Tags: Emergency Fund, Each Month