Savings, Step 1: Emergency Fund

As you get your savings started, it turns out there is a method to the order in which you should save.

The first step is the Emergency Fund. An emergency fund is for...EMERGENCIES! Don't touch it for anything else! That would include unexpected medical procedures, loss of a job, etc. Use self control.

How much is enough? Most experts recommend estimating your average monthly expenses and then multiplying that by six to twelve months. Some also say that you should save 6 to12 months of your monthly income rather than expenses. Whichever you choose to do, the idea is that you will have plenty to get by should an emergency occur and your family will be much less likely to experience financial distress.

How to do it? Each month, when you are saving 20% of your income, put that 20% into an emergency fund. Use an account that is liquid (meaning it can be easily converted to cash) and low-risk -- probably a savings or money market bank account, NOT an investment account as the balance could decrease. Keep doing this until you have 6 to 12 months in savings and then you can go on to the next step in savings, which I'll tell you about later.
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