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 sale.

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.

“Then we have this idiot box, the TV, with somebody yelling, ‘Zero-percent interest, buy this now!’ People get overwhelmed. They know they’re not supposed to spend the money, but they do.”

Limiting your access to the emergency fund may help. You need to have immediate access to some of the money, but not all of it.

As you’re growing your emergency fund, consider keeping it in a money market account or fund until you have about two months of living expenses. Move one month of expenses to a one-month CD. When the CD matures, roll the principal and interest into another one-month CD.

All the while, continue making regular payments to the emergency fund money market account. Eventually, you’ll have another month of living expenses that can be used to invest in a two- or three-month CD. If you are opting to set aside six months of expenses, continue the process until you can comfortably purchase a six-month CD.

Paying your future self

But before you can stash it aside, you need to get started building it.

Whatever financial situation you’re in, the first step in building an emergency fund is to figure out where your money is going, according to Tom Grzymala of Alexandria Financial Associates in Alexandria, Va.

“People don’t know where they’re spending money,” says Grzymala. “If they’re bringing home $70,000, they can only account for $50,000.

— Updated: Dec. 29, 2006

“Generally, maybe 20 percent of the folks have a handle on what they’re doing financially. Many don’t have the foggiest. Use something like Quicken to keep track of where your money is going. It tells you whether it’s going to food, clothing, shelter or pizza,” adds Grzymala.

After seeing where your money is going, it’s a lot easier to decide where you can cut.

If you’re concerned about being laid off in the near future, it’s all the more critical to build the fund as fast as possible.

Taking a loan from your 401(k) to quickly build an emergency fund is generally considered a bad idea. If you lose your job, you’ll have to repay the loan immediately or pay taxes and penalties on the amount withdrawn.

Loans from IRAs generally must be repaid within a short period — usually 60 days — so don’t even consider that.

A controversial move that may be appropriate if you’re fairly young is temporarily stopping payments to your retirement account.

“Contributions to a retirement fund are important,” says Grzymala, “but I’d rather have three to six months cash reserves than borrow from a 401(k), lose my job and then have to pay penalties.

“Rather than taking $100 and putting it into the retirement fund, use it to pay off that 14 percent loan — at least for a short period. The future is nice to plan for, but take care of the now.”

Some experts say they’d only stop contributions as a last resort. You’ll miss out on the tax-deferred growth and you may be giving up a matching contribution from your employer.

Another consideration might be your Roth IRA. You’re allowed to withdraw the contributions at any time without penalty. Unfortunately, you can’t replace that money because current Roth rules limit annual contributions. But using those funds could get you out of a temporary bind without resorting to more drastic measures.

Tapping any retirement account for emergency funds is something you want to avoid unless there are no alternatives. You don’t want your account to stop growing, or to give up matching funds and tax deferral, and you certainly don’t want to pay penalties.

Budget-clipping tips

It’s a Bankrate mantra, but one that works wonders when people stick with it: Quit using credit cards.

Credit cards are one of the most expensive forms of money. Unless you’re in the habit of paying off your credit card bills each month, don’t use the cards for anything you can eat or wear.

“Consolidate your debt. If you have several credit cards at 13-, 14-, 16-percent interest, fold them into a home equity loan and write off the interest payments,” advises Grzymala.

Experts also differ a bit on that one.

“A home equity loan, that’s borrowing,” says Chris Cooper. “Use that option after using Roth contributions and, possibly, tapping into the equity in your life insurance.”

Clearly, there are options that are riskier than others and an option that’s appropriate and appealing to one person may make another person cringe.

Here are some tried-and-true suggestions for budget trimming that can work for just about everyone.

Mortgage rates are relatively low — consider refinancing your mortgage and, while you’re at it, your car loan, too.

If you live in an area that has good public transportation, see if you can get by on one car instead of two.

“Make your present car last. Good maintenance will enable you to replace it every six to eight years instead of every three years,” says Grzymala.

“Do an energy check on the house. Replace cracked storm windows, renew the weather stripping. Don’t renew subscriptions to magazine or newspapers you’re not reading. Eat out less often, learn how to use leftovers. If you stop at Einstein’s every morning for coffee, make coffee at home.”

And, Grzymala adds, “When the 12 year old says, ‘Where’s my $10?’ cut it back to $7.”

It may not make you the most popular parent on the block, but you’ll be doing your children a favor by teaching them to be frugal and to develop good spending habits.

Saving money on your own takes discipline but, like most other things, it becomes easier over time. The peace of mind that comes from knowing you have financial resources for when times are rough can be worth the sacrifices you make now.

— Updated: Dec. 29, 2006

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