Lamb suggests working toward one month’s fixed expenses, which includes rent, groceries, transportation and insurance. “Don’t worry about your eating-out money or shopping money,” she says. “If you are in an emergency or a transition, the whole idea is you would cut back on your spending.”
A savings account that pays a high interest rate is a smart place to keep your fund, both planners say, so it can grow.
If you are in an emergency or a
MAKE USE OF WINDFALLS An easy way to kick-start your fund is to use windfalls — part of a tax refund or even birthday money from relatives. Young professionals typically get tax refunds instead of owing money, Gabor says. The IRS allows you to direct deposit your refund in up to three accounts, so you can send part directly to your emergency fund. If no windfall is imminent, check your checking account. Leave a small buffer so that you aren’t at risk of overdrawing and put anything else in the emergency fund to earn interest, Lamb says.
transition, the whole idea is you would cut back on your spending.
There’s no ideal amount to keep in your checking account. But both financial planners warn that having a lot of extra “cushion” in a checking account carries the temptation to spend it.
PLAN FOR NON-EMERGENCIES If you’re building the habit of saving for emergencies, use that muscle to plan for other expenses. Financial experts often use the terms “irregular expenses” and “unplanned expenses.” An unplanned expense is something you don’t foresee, such as an illness or car repair. Irregular expenses are predictable costs that come up during the year — think of car registration fees or holiday season spending. Ideally, an emergency fund shouldn’t be used for irregular expenses, Lamb says. Instead, build a separate pool of money for them. “Sit down and look at last year’s worth of spending and look at the things that popped up periodically,” she says. “Think about the coming year and how that might change. Figure out the annual amount and divide by 12. That dollar amount is what you set aside every month in an irregular expense account.”
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