It's easy to assume that disasters won't strike you, or to simply hope for the best. But disasters do happen to lots of people who are also not expecting them -- things like job loss, an expensive medical crisis, or a major home repair emergency.
An emergency fund will protect you from being wiped out or left in financial dire straits. It should be stocked with at least a few months' worth of living expenses (think food, rent, insurance payments, utilities, gas money, etc.). If you're risk-averse, have dependents, or are in a field where it would take a long time to land a job, you might want to sock away as much as nine months' or a year's worth of living expenses.
Here are some tips to get your fund started and well under way:
1. Establish your fund in a sensible place. A savings account, money market account, or short-term CD is a good idea. Long-term CDs will levy penalties if you need to withdraw funds early, and the stock market can be risky because stocks can plunge over the short term.
That said, though, if you're willing to take on a little risk, you might keep a few months' worth of emergency money in a safe place such as a savings account, and keep the remainder somewhere that will offer a little more growth.
2. Make saving easier through automation. You might, for example, set up automatic withdrawals from your bank account into your emergency account. Your employer might be able to automatically deduct a set sum from your paycheck, too, and plunk it into your emergency fund. The point here is to set it and forget it, since you've likely got a lot of other things going on.
4. Lower some small expenses to free up money to set aside. A money-saving strategy you'll often run across is cutting out or cutting back on costly habits such as jumbo mocha lattes or cigarettes. If you spend just $5 less a day on such items, that will total more than $1,800 by the end of the year.
5. Lower some big expenses to free up money to set aside. There are myriad ways to rein in your large-item spending. Spend a little time shopping around for the best deal on your home insurance and car insurance, and you might surprise yourself by saving hundreds of dollars. Consider canceling or postponing a big expense, such as a fancy vacation or a large-screen TV, until your rainy-day fund is fully funded. And instead of using windfalls like tax refunds to splurge, earmark them for your emergency stash.
Also, remember those budgeting rules you followed in your younger days? Perhaps it's time to revisit them. Take a close look at lots of your expenses, and you may find more ways to save, such as switching to a generic form of a medication, switching from your $40-per-month gym membership to a $10-per-month one, or eating less frequently at restaurants.
We all need to be prepared for a financial disaster. Don't leave your fortune to fate -- protect yourself via an emergency fund.
You can follow longtime Motley Fool contributor Selena Maranjian on Twitter @SelenaMaranjian.