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Financial Literacy - Emergency fund
SPOTLIGHT
Jean Chatzky
Take baby steps to build a sizable emergency fund, says this personal finance expert.
Creating an emergency fund

Interview: Jean Chatzky

Plain-spoken best-selling author and radio host Jean Chatzky has some empowering words for those having trouble starting an emergency fund: Small steps count. Breaking down typical defenses against saving money, she offers a simple plan that anyone, no matter how cash-strapped, can use to pad their finances against disaster.

At a glance

Why an emergency fund?
First of all, why should people have an emergency fund?

Because when you don't have an emergency fund or an emergency savings account and something goes wrong, your only choice -- or the choice that most people resort to -- is to put it on a credit card. And then as we've seen with many people, it typically costs much more than the original emergency to pay it back. Having an emergency fund keeps you out of debt, because whether the emergency is a big one -- a health crisis -- or a smaller one -- the transmission on your car goes -- having a little bit of cash set aside for that purpose enables you to pay for the emergency yourself, rather than trying to scrounge up assets from some other source.

How much does it take?
How much do you recommend people save up?

I like to see people have anywhere between three to six months' worth of living expenses in a liquid emergency account. Now, living expenses are different from the amount of money that you spend every month to live. When I'm talking about living expenses, I'm referring to the amount of money that you would have to spend, such as rent, your car payment and the grocery bill -- which does not necessarily cover the cost of eating out. Living expenses should also include the total of a basic trip to the drugstore, but not the kind of visit to the drugstore where you buy every other thing you want that's on the shelf.

-- Posted: July 23, 2007
 
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