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

Interview: Jean Chatzky

If you're talking about a two-income household, then I think it's OK to have a three-month cushion because if one person loses a job or is unable to work, it's not likely that it'll happen to the other person at the same time.

Make financial goals tangible

If you're a single person, particularly if you're a single person with dependents, I like to see closer to six months.

Excuses to getting started
What keeps people from starting an emergency fund?

People see that three to six month suggestion -- and it doesn't only come from me, it's fairly typical -- and it's such a daunting number, that they get scared to start.

How can they work around that way of thinking?

By taking one step forward. I was having a conversation on my radio show the other day with Chris Gardner, who is the man who wrote "The Pursuit of Happyness" -- Will Smith played him in the movie -- and we were talking about taking one step at a time, putting one foot in front of the other, and he said, "and baby steps count." And he's absolutely right. Small steps are inevitably going to be your first steps, and they definitely count. Once you have put aside $25 one week and discovered that you can live in fact without that $25 in your spending account, then you have the confidence to know that you can do it again. You may even have the confidence to think, "Well, hey, if I put aside $25 and I didn't miss it, I'm going to try to put $50 aside and not miss it."

Baby steps count.

So, putting aside just a little bit each week will help.

Yes, because what happens when you see money begin to grow in your name is that you start to feel good about the fact that that financial stability is increasing, and it inspires you to want to do more. There are a lot of life experiences that work this way. If you go on a diet, once you lose a pound or two, all of a sudden your confidence is soaring and you can lose the next five to seven. If you go out to try to jog for the first time in your life, the first time that you tackle that mile, all of a sudden you feel like you can do three or five -- and guess what, you can.

-- Posted: July 23, 2007
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