Having a financial cushion is a goal of many families as they are building their finances.  Emergency funds are essential buffers when unexpected things happen, such as job loss. How, though, can you get started with it? What do you need to do to protect yourself?

How Big Should Your Emergency Fund Be?

The first thing many people wonder is the right amount for an emergency fund. Most financial gurus recommend you have 3-6 months of expenses in your account.

If you’re looking for something more tailored to your family’s needs, then there are several factors to consider when determining your emergency fund.

• Family Size - If you’re a dual income couple with no kids or other family obligations, then you’ll probably won’t need as a big of en emergency fund as a family of 5.
• Family Expenses – Your family’s lifestyle has a big effect on the size of your emergency fund. If you have high monthly expenses, then logically, you’ll need more money to save. If your expenses are due to unnecessary spending, then you may want to discuss ways you can lower it. If it’s due to circumstances (i.e. medical bills), you’ll have less room to work with. It’s still possible though to explore options to lower your bills.
• Income Streams – If you have 2 or more income streams coming in, that can decrease the size of your emergency fund. You should still have one though, as unexpected events can happen.

If you’re still stumped than shoot for 3 months worth of expenses. Should you lose your job, your family won’t have to panic as you try to find employment.

If you’re in debt, please have a starter emergency fund on hand before you go ahead and pay down your debt.

Where Should You Save Your Money?

The next decision you two should make is where you need to deposit your money. With an emergency fund you need to focus on 3 things:

• Easy access to it in case of emergency – It does you no good to have a high interest rate if you can’t get to it quickly when it’s most needed.
• Safe place to store you money – Whatever you choose, make sure it’s either covered by the FDIC (banks) or NCUA (credit unions).
• A place where it can grow – If you can earn a decent interest rate for your savings while meeting the two previous criteria, then go for it.

Here are some brief thoughts on some of the top places to open your account with. Look around on Bankrate to compare savings accounts. You should be able to find something to suit your needs.

Brick and Mortar Banks

Most people are familiar with how banks works. An advantage of going  with a bank for your savings is convenience. Some of the bigger ones, like Wells Fargo and Bank of America, offer many branches across the nation. I would recommend checking their rates before you open up an account; you may find that a local bank may offer a higher rate.

Credit Unions

Since credit unions are non profit and member owned, you can sometimes find a much better deal with them than at your local bank. Depending on what credit union you choose, though, you may be giving up convenient locations.

Online Banks

We’ve been using ING Direct for our savings and we’re extremely happy with the service. While their interest rates are not the highest among online banks, they are decently competitive and we have easy access to our money.

If you don’t like them, but are looking at online banking as an option, here are some popular ones right now:

• HSBC Direct
• FNBO Direct
• Charles Schwab
• Capital One
• Ally Bank
• Everbank
• Citibank Direct

The great things is that you have many options to choose from. Find what works for you and stick with it.
Note: Certificate of deposits (CDs) can be an option if you already have some money immediately available for an emergency, but want to save more at a higher interest rate. You may want to have open a CD ladder to maximize your interest earned.

Finding the Money to Build Your Emergency Fund

So you’re fired up. You know how much money you need to have in savings and where to put it. Now you’re looking for ways to get money for it. How do you do it?

It’s not glamorous and for some it can be painful, but the first thing I’d recommend is cutting back on unnecessary expenses.

Let’s face it, for many people (myself included) living beyond their means is why they are living on a tight budget with little or no savings. I had to face the facts and change my spending habits. My husband was a tremendous help and together we were able to simplify our lives (while still enjoying it).

Another wonderful option that can really jump-start your emergency fund is selling all your clutter. You’ll clean up your house, make some cash, and you won’t have to reallocate your monthly cash flow. If you’re serious about making some money, Baker has just release a guide to turning your clutter into cash.

Continue Saving While Paying Down Debt

Once you have a starter emergency fund ready, you may feel like you should go full throttle on paying down your debt, as Dave Ramsey has encouraged people to do. I suggest that you continue to set aside some money for building up your emergency fund at the same time. Debt Free Adventure has a wonderful 75/25 method accomplishing both without burning yourself out.

Thoughts on Building an Emergency Fund

I shared my take on getting an emergency fund  started, so I’d like to hear your thoughts. How have you been able to work as a couple and build your emergency fund? What other financial goals are you tackling together?

Photo Credit: alancleaver_2000

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