Establishing an emergency savings account is vital
in good times and in bad. The purpose of the fund is to sock away
three to six months' living expenses. But this money could also
be used when you're staring at major, unplanned expenses such as
a car breakdown or a leaky roof.
What's important is that you put the money away consistently,
and then tap it only for true emergencies. The success of any long-range
savings plan depends less on the rate of return than on consistently
putting money away and leaving it there.
Lock it up and hide the key
People who are living on a lean-and-mean budget will have the toughest
time setting aside money for emergencies. If it's possible to squeeze
out another $40 or $50 each month and put it in a money market account,
it's worth doing.
Morris Armstrong, a certified financial planner based
in New Milford, Conn., says to treat the emergency fund as a bill.
"If you determine you need $3,000 in the
fund, look at what you can afford to save each month and use it
as a bill to pay yourself," says Armstrong. "If it's $100
a month, that's fine. Put it away and let it grow.
"When you've saved the $3,000 you'll be in the
habit of putting away that $50 or $100 a month. Keep doing it. Maybe
put it in a nonretirement brokerage account."
Other experts echo the idea of treating the emergency
fund as a bill. Put the money away and don't be tempted by the latest
Putting money aside on your own is hard. Retirement
plans are successful because the money comes out of your paycheck
before you can get your hands on it and because there are taxes
and penalties for early withdrawals.
But stashing money in an easy access money market
account takes discipline.
"Once you've got the money in your checkbook,
there are all these demands coming at you -- the mortgage, taxes,
the kid's braces, McDonald's," says certified financial planner
Chris Cooper of Toledo, Ohio.