Most personal finance experts agree: The first thing you should do — after meeting basic needs — is to establish an emergency fund.
Life is full of surprises, many of which cost money — a thief smashes the windshield of your car, your son gets sick, your water heater overflows. When people live paycheck to paycheck without any savings, they’re at the mercy of these small crises. Sometimes a tiny problem becomes a huge one because the victim wasn’t prepared for possible trouble.

The Emergency Fund: A Buffer against Financial Trenches

The need for an emergency fund: Life is so beyond prediction and it may bring certain unwanted expenses at the most unexpected time. From sudden car repairs to some unexpected medical bills, emergencies can upset financial stability at any moment. An emergency fund is definitely one of the most important personal finance steps one could take as soon as primary needs have been covered. It provides a sort of cushion that imparts peace of mind and protection from the unexpected.
What is an emergency fund? An emergency fund is a pool of money kept aside and reserved for use in time of unexpected expenses/ crises. The fund is not to be used for discretionary purchases—like going on a vacation, improving the home, or other luxury items. Rather, it’s meant to be resorted to in situations such as:

• Car accidents or repairs
• Medical emergencies
• Home repairs
• Loss of job/loss of income

Financial Buffer

Having this financial buffer will keep minor issues from turning into significant problems when living paycheck to paycheck.
Why You Need an Emergency Fund Without an emergency fund, even minor financial setbacks can spiral into debt. Suppose you don’t have any money put away: a sudden repair or a medical bill can put you in the position of having to rely on credit cards or loans—possibly building up much harder-to-pay debt. In many ways, the emergency fund is like a self-insurance policy; it provides a means to protect you and your family from financial shocks and keeps you steady during crisis time.
How Much Should You Save? Personal finance experts are unanimous in the importance of emergency funds, but the amount differs:

• David Chilton, an author of The Wealthy Barber, recommends starting with $2,000 to $3,000 for small crises.
  In The Six-Day Financial Makeover, Robert Pagliarini recommends saving at least three months’ worth of expenses.
• Jean Chatzky suggests three to six months’ worth of expenses.
• The authors of Your Money or Your Life, Joe Dominguez and Vicki Robin, for example, recommend six months of living expenses. Only after achieving financial independence, however.
• Dave Ramsey’s process goes in two steps: First, the $1,000 to cover the little emergencies, and then work your way up to three to six months of living expenses.

Financial Condition

Ultimately, it is a matter Of the right amount being whatever you feel comfortable with, given your financial condition. Even starting small, even setting aside $500, $1,000, or $5,000, builds a foundation for the future. Work toward building up to six to twelve months of living expenses over time.
How to Get Started with Your Emergency Fund Setting up an emergency fund may seem intimidating, but it’s easier than you think. Here’s a step-by-step guide to get you started:

• Select a Safe Location for Your Money Choose a home for it, such as a high-yield savings account through an online bank or in a local credit union. You want this money to grow but to be accessible, too. Place it in an account that is separate from your everyday checking to reduce temptation.
• Start Small and Build Over Time Start by saving a small amount, say $500 or $1,000, to make sure you are protected from life’s little emergencies. Then continue to grow your fund gradually once your debt is under control.
• Automate Your Savings Set up automatic transfers that pull some of your income into the account on a regular basis. Be it weekly, bi-weekly, or monthly, automating the process ensures consistent growth without extra effort.
• Avoid the Urge to Spend Set aside money in your emergency fund for true emergencies only. Try to avoid the temptation of using some or all to cover non-emergencies. Sometimes keeping the money a little out of the way—across town in a bank, or in an account without an easy ATM defense—can help.
• Set a Savings Goal Identify a savings target that is right for you. For many, the target should be $10,000 or more to cover many months of expenses. Monitor your progress while reinforcing interim milestones in positive ways.

When to Use Your Emergency Fund? It is equally important to know when to use your emergency fund. A vacation, new shoes, or a video game console are not emergencies. But if your car breaks down, or you face unexpected medical bills, then digging into your emergency fund is warranted.

The key is to know what classifies as an emergency in your life. Once set, then follow the set guidelines so that the fund will be used only in times of a real crisis.

Savings Strategies: How to Build Your Fund

1. Instill the Savings Habit This is building up the emergency fund regularly. Set achievable goals, automate the contributions, and track your progress regularly. Building up a small and big fund over some time for financial contingencies is better than getting nothing at all.
2. Manage Your Cash Flow Keep track of when money comes in and when it goes out. Any adjustments you can make to allocate a little more to savings—even just small amounts into your emergency fund—are better than none.
3. Make the Most of Windfalls If you come into money in a big way—say, through a tax refund or even a holiday bonus—you’ll want to put some of it toward your emergency fund. This is probably the biggest one-time boost you could give your savings without affecting your normal budget.
4. Work Contributions to Leverage Check to see if your employer offers options to split your paycheck between accounts. This is a painless way to save because the money will be directly deposited into your emergency fund.

Where to Park Your Emergency Fund It is very important to choose just the right place to store your emergency fund. The fund should be secure, accessible, but not so tempting to spend. Consider these options:

• High-Yield Savings Account: This will generate interest but keep the funds liquid.
• Money Market Account: Combines higher interest rates with easy access.
• CDs or Certificate of Deposits: It pays higher interest but is less immediately available.
• Prepaid cards/cash: These are ideal for smaller funds, as long as they are kept in a very safe place.

Conclusion:

Secure Your Future Now The building block of finance for anyone is an emergency fund. Whether it’s just starting at $100 or building up to several months of living expenses, the key is to just start now. Confidence, protection from financial crises, and even greater financial stability and future success can be derived from a well-stocked emergency fund.