I am often asked the question, “How much money should I set aside as an emergency fund?” There is no cut and dried answer but using CFP® guidelines you should keep between three and six months’ worth of fixed and variable expenses in a liquid account such as a money market account.

OK so the next question is usually, “OK is it three or six?” Before we get to that answer we need to get our arms around the whole concept of this “emergency fund” idea. It has been a recommendation by financial planners for many years and the concept stepped into the spotlight in the aftermath of the great meltdown of 2008. Many people were laid off from their jobs and found themselves unemployed for a longer time than they anticipated, often outstripping their savings. In other words, people felt like it could never happen to them or they just didn’t think they could set aside extra money for such an unexpected need.

Well, the truth is it can happen to any one of us so we have to get prepared. The second concern will be addressed in this discussion. Don’t underestimate your ability to save because in reality, you can start today to build a fund.

Experience being the great teacher that it is put a focus on setting aside money while you are employed for the proverbial “rainy day”. The recommendation is three months of fixed and variable expenses if:

• You are single with a second source of income
• You are married and both of you work with a similar income or
• You are married and only one spouse works but you have a second source of income (income property for example)

What is a second source of income?

• Alimony (if it is significant i.e. not just a few hundred dollars)
• You are the beneficiary of a large trust fund
• You consider yourself “financially well off” i.e. you have substantial investment income and/or other income coming in each month

If the above scenarios don’t apply then use six months as your emergency fund gauge.

Here are 5 things you can do to establish your emergency fund:

1. Enroll in my free Budgeting That Makes $ense Course to learn more about how your emergency fund fits into the all-important budgeting process.
2. Once you have a good handle on your expenses then determine if you need to multiply by 3 or 6 based on the information I discussed above or you can use this handy calculator.
3. Open a separate account for your fund. Don’t mingle these funds with your day-to-day checking account, etc. I recommend using SaveDaily for this account because you can link it to your checking or savings account. You can have as little as $1.00 deducted and invested in your emergency account.
4. Use systematic investing to build up your emergency account. It works like your 401(k). Again, SaveDaily allows you to set up 2 different times during the month to have money automatically withdrawn from your checking or savings account and invested in your money market account.
5. Be disciplined and vigilant. Think of your emergency fund as untouchable except for those true emergencies like losing a job and/or unexpected healthcare expenses.

No one expects to encounter an emergency. That’s why you have to plan for the worst case scenario and expect the best. Being prepared will put you on the offensive rather than reeling financially and putting yourself and your family in a financial hole that could take years to get out of. It can be painless and if done right can grow fairly quickly.

What challenges have you had or do you foresee when it comes to setting up an emergency fund?  Click here to add your comments