How Do You Build an Emergency Fund? You may have heard it so many times that you're actually sick of this particular piece of advice: save up a rainy day fund before you start investing in stocks and bonds for retirement or anything else you're interested in. The size and scope of an emergency fund are debatable, but the need for it is not. Whether it's just three months of basic living expenses or two full years, you need some kind of savings to tap into in the event you lose your job or have your income disrupted. Such an emergency fund should also be in some kind of easily accessible liquid asset. A basic savings account works, but certificates of deposit might work. Money market mutual funds that bear interest preserve value, offer liquidity and retain easy access to the funds. Still, how do you even start building an emergency fund? Consider the following five steps:
1. Start Small and Build: The idea of two years of savings being parked away might give you peace of mind, but the idea of saving up that much might intimidate you. Start with just saving up one pay period's worth of money first, and then move up to more incremental goals along the way. 2. Make Contributions Regular: You might have to start small with your paycheck contributions to your savings. You don't want to impede your current cash flow, so pick an amount you can save regularly over time. You can build it up later as you get better with money management. 3. Automate It: If you have direct deposit, then set a portion of it to go into a savings account separate from the checking account where most of your money goes and can get spent easily. 4. Watch Your Spending: One easy trap once you have some savings is starting to spend more again. Avoid this and any new credit cards. Keep your savings. 5. Know When to Stop: Eventually, you'll hit your goal for an emergency fund. At that point, cap it off and leave it alone. Start directing your money towards other savings goals or investment classes that offer you more rewards and growth.