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Could you cover the cost of a new water heater if yours were to suddenly go on the fritz? Would you be forced to adopt a Ramen-only diet if you found yourself on the wrong side of your company’s “rightsizing”? And what if your contralto son started puberty, ending his professional opera gig that helped cover tuition for the chichi private school he loves?
Give us 60 seconds and we’ll show you how to establish a short-term stash of emergency cash to cover life’s little hiccups (and croaking ariettas).
0:60 Calculate how much you spend every month
How much does your life cost on a monthly basis? Find out by adding up what you spend each month on necessities such as food, shelter, transportation to work, and anything that you promised to buy your kids. Bump up this number a tad to account for things like job-hunting expenses should you suddenly find yourself in need of a new gig. Then multiply it by three or six (for the number of months that you want to cover), factoring in other available monetary resources and the number of people for whom you’re financially responsible. Now you have the amount of money you need to stash in your emergency savings account.
0:48 Figure out how quickly you will meet this goal
You want to fund your cash kitty ASAP (emergency expenses tend not to wait around until it’s convenient). Come up with an amount you can afford to contribute each month. Make it one of those must-pay expenses — just like your electric bill and grocery money. Yes, it’s that important.
0:37 Pick a parking spot for your cash
Easy access is essential when we’re talking about emergency savings, so your money should be stashed somewhere you’ll be able to get your hands on it quickly … in case of, well, an emergency. It should also be in a “safe” investment — meaning one that won’t tank every time the stock market takes a tumble. That narrows it down to:
- High-yield savings accounts.
- Money market accounts.
- Money market mutual funds.
0:29 Click around and comparison shop
Look at bank ads in newspapers, check out the best national rates on Bankrate.com, see what your broker is paying on cash in your brokerage account, ask your regular bank or local credit union what they offer, and get information on money market funds from websites like iMoneyNet. Find out:
What interest rates are available.
- What interest rates are available.
- What are the comparable yields over identical time periods.
- What fees (if any) there are to purchase and maintain the investment.
- The minimum investment required to get favorable interest rates.
(Investors beware: Some institutions will offer aggressive rates in order to lure you to send them your dinero, only to lower the rates soon thereafter. Check historical rates at Bankrate.com to test the interest rates over time.)
0:17 Just do it
The clock is ticking. There’s no time to waste. A short-term emergency fund is one of The Motley Fool’s top money “must-haves” for money management: In fact, it may be the very thing that saves you from a long stretch of high-interest credit card debt after a fender-bender, chipped tooth, basement flood, or really unfortunate haircut.
If you’re having trouble saving, we highly recommend an automatic transfer program. You can also see if your employer will split your paycheck (direct deposit) between your ordinary account and your short-term savings account, or you could set up an auto-transfer from your checking account into your emergency account.
0:03 Just do it through our partners!
Do your homework: See how accounts from some of the different institutions out there stack up.
Got a few minutes to spare?
- Our savings collection offers a deeper look at emergency savings.