How to Build an Emergency Fund Now

It's a foundation of any financial plan. But too often people fail to create an emergency fund or put enough money in it — forcing them to tap credit cards or retirement accounts in a cash crunch. And now that the economy has plunged into a recession and households find their income pinched from lost jobs or reduced hours, the benefit of a cash cushion becomes clear.

If you don't have an emergency fund — or yours needs padding — here are some steps to take today:

Set a target. The general recommendation is to keep three to six months' worth of living expenses in an emergency fund. But you might get by with more or less, depending on your job security or other reliable household income. For example, suggested savings goals are:

  • Dual income couple: Three to six months of living expenses
  • Sole wage earner: Six to 12 months' worth
  • Work in public sector or other stable industry: Two to four months
  • Work in economy-sensitive sector: Six to nine months

Calculate monthly expenses. Add up your rent or mortgage payment, food, utilities, transportation, health insurance and other monthly essentials. Also factor in necessities that you pay less frequently, such as auto or homeowners' insurance, because you'll need to keep up with those bills if your emergency is a sudden job loss.

Park it for easy access. Keep your emergency savings in an interest-bearing, readily accessible account — separate from your regular savings or checking account. That will make it less likely you'll tap it for non-emergency expenses.

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Commit to saving. Emergency funds aren't built overnight, although it may take less time these days. Consumer spending has plunged during the coronavirus pandemic as more people stay home instead dining out or traveling. The national personal savings rate — the percentage of income left over after taxes and other spending — was 19% in June, more than twice the rate from a year earlier.

If your usual spending has dropped, steer the savings into your emergency fund. Or dedicate a portion of each paycheck to emergency savings. For example, saving $75 from a weekly paycheck will amount to $7,800 in two years. Reach your goal even faster by depositing a bonus or tax refund into the fund.

Please note: The contents of this publication provided by ICMA-RC is general information regarding your retirement benefits. It is not intended to provide you with or substitute for specific legal, tax, or investment advice. You may want to consult with your legal, tax, or investment adviser to review your own personal situation. Some of the products, services, or funds detailed in this publication may not be available in your plan. This document contains information obtained from outside sources and it references external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy. In addition, rules and laws can change frequently.

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