Emergency funds: The basics

You’ve heard it time and again: It’s important to set aside three to six months’ expenses for an emergency fund. Easier said than done, right? If you have a lot of debt, live on a fixed income or have unpredictable expenses, putting aside that much money can seem nearly impossible. The good news is you don’t have to do it all at once — even a little money in savings can go a long way.

Slow and steady can win the race

Starting small can be a key to successfully building a solid rainy-day fund. If you’re too focused on finding a big chunk of money with which to start saving, you may feel overwhelmed. So, consider putting aside a little each week, even if it’s just $10 or $20.

Want to make saving even easier? Go automatic. Have the money taken out of your checking account automatically each week and deposited into some kind of savings account. You won’t have to think about it, and you may not even notice the money is gone. Over time, you may realize that you can afford to set aside more money each week, and your balance can grow faster.

Making the most of what you already earn

Where will the money you need for your emergency fund come from? Here are a few ideas and tips to consider for finding extra cash:

• Use your tax refund. Most of us get a tax refund each year. If you can, consider putting at least some of your refund in your emergency fund. It’s an easy way to quickly build your balance.
• Pay yourself first. Instead of getting a refund every year, adjust your tax withholding by filing a revised W-4 form. Your paycheck will get a bit of a boost, and you can have that extra money put into your emergency fund automatically.
• Make a budget. Simply by keeping track of where your money goes each week, you’ll likely find areas where it’s easy to cut back. Fewer coffee runs, one or two more dinners at home, using coupons at the grocery store — there’s extra cash hidden in all kinds of places, and it can add up fast.

Where to stash that cash

Where can you to put your emergency fund? There are many options, consider these options:

• Savings account. The point of an emergency fund is to have a reserve of cash that’s easily accessible when you really need it. That’s why a savings account at your bank or credit union is a good place to start. If it happens to pay a little interest, even better.
• CDs. For a little more interest, but less flexibility, consider putting your emergency fund in a bank CD. Bank certificates of deposit are FDIC-insured up to applicable limits and offer a fixed rate of return. It’s not as accessible as a savings account due to potential withdrawal restrictions, but your money may grow a bit faster during the term of the CD.
• Treasury bills. Another option is buying a U.S. Treasury bill. A Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of one year or less. The longer the maturity date, the higher the interest rate that the T-Bill will pay to the investor. However, T-bills have interest rate risk meaning there is a risk that existing bondholders might lose out on higher rates in the future.

The best time to start saving for a rainy day is when it’s not raining. It is generally a good idea to have enough cash to cover three to six months of essential living expenses. Consider starting now, starting small, starting slow, and before you know it, you may have enough money set aside to help protect yourself and your loved ones in case of an emergency.