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Major expenses have a way of coming along when you least expect them. A leaky roof. A sudden illness. A furlough or job loss. Such events can leave you scrambling for cash at a moment's notice.

That's why you need to have an adequate emergency fund—an account apart from your regular savings that you can reach quickly when you need to. Having a "rainy day" account will save you from having to dip into your retirement savings and other long-range investments, or taking on high-interest debt.

A common rule of thumb is to set aside enough for three to six months worth of living expenses. However, given today's uncertain economy and job market, you may want to stash away even more.


So how do you figure the amount you'll need to stock away?

First, add up your fixed monthly expenses—the ones that don't change from month to month. Include your mortgage and/or rent payments, insurance premiums, and property taxes. Then add in the average monthly amount of your variable expenses, including groceries, utility bills, transportation, clothing, and other expenses. Then calculate how much your monthly expenses will be during a six-to-nine-month period.

Don't include your discretionary expenses—restaurant meals, vacations, and other non-necessities—since you won't likely be paying for them during an emergency.

Start saving now

Accumulating a sufficient emergency fund will take some time, so it's important to get started if you haven't already. Keep your immediate goals small and manageable. Review your savings and checking accounts to determine how much you may be able to move to an emergency fund. Consider any windfalls you might be receiving, such as a bonus or a tax refund.

You should also track your discretionary spending for a month to figure out where you can cut back, and divert that money to your emergency fund.

Emergency fund needs to accessible

Convenience, stability, and liquidity are crucial in choosing where to keep your emergency fund savings. You'll need an account that's easy to access by electronic withdrawals and checks.

Consider keeping your emergency fund in a bank account or in a conservative investment like a money market fund so that the funds will be readily available.

Whichever type of account you choose, make sure it is separate from your other investments so you won't be tempted to use the money for anything other than real emergencies.

Once you establish the account, get into the habit of adding money to it regularly. A simple system to boost savings is to set up an automatic investment plan. Whether it's weekly, biweekly, or monthly, create a schedule and stick to it. When you make saving automatic, you won't even have to think about it.

Above all, remember to add to your emergency fund regularly, even if it's a small amount. The success of any savings plan depends less on the rate of return than on consistently putting money away and leaving it there.