Building an emergency fund

One of the greatest personal finance lessons that many should’ve learned during this recession is to have an emergency fund. The massive job cuts across industries and foreclosures left many jobless and homeless.

Thing is, life tends to screw you over big time once in a while. It might be as communal as a recession or as isolated such as having a major boo-boo at work. So everyone has to be prepared.

Traditionally, the emergency fund’s money that you stash away that should cover at least three months’ worth of expenses. During the early parts of the recession, many believed that it should be six months’ worth. Now, the safe number seems to be enough money for a whole year.

Here’s a guide to having one:

1. Build an emergency fund – This is basically a savings project and would require you to probably employ some lifestyle changes. You have to commit part of your income to it. If you feel that a year’s expenses is a tough target, then plan for a three-month emergecy fund first. Remember, you have a target and the sooner you get there, the better.

2. Protect your emergency fund – By no means should you tap into your emergency fund, unless, of course, it’s a real emergency. Fancying that new iPod? Make it a separate savings project.

3. Replenish your emergency fund. – So the poop hit the fan. Big deal. At least you won’t be living like a hobo for the meantime. Just be sure that you work your way to earning again and prioritize earning back what you spent of your emergency fund.