10/1/2008 9:00 AM ET|
Building your emergency fund
PORTFOLIO 104: In general, you should have plenty of dollars stashed in an emergency fund before you invest a penny. But where will you find the money, and where should you keep it.
You've figured out your goals. You know what they'll cost. So you've put all of your money into your investment portfolio.
Then you lose your job. Where will you get money for food, rent, your phone?
You don't want to dip into that investment portfolio. After all, you've built it with a particular goal and time frame in mind. Touch it now and risk making your future dreams unattainable.
That's why it's important to set aside money in an emergency fund before you begin investing. Here are some pointers for what your emergency fund should cover, how long it should last and where to put it.
What to include
Don't assume that any future unemployment insurance payments can take the place of an emergency fund. Think of collecting unemployment as a way to strengthen the safety net you're constructing. It shouldn't be your sole support. And if you do collect unemployment, your emergency fund simply will last longer.
We recommend that you cover all conceivable expenses in your emergency fund.
Food and shelter: How much do you spend on groceries each month? If you don't know, now is a good time to start tracking that. And if you eat out a lot, you'll either need to include that, or plan on higher grocery bills. If you have pets, include the cost of their food and care in the tab.
Unless you're ready to move into your brother-in-law's basement, be sure to cover your rent or mortgage payments, too. And don't forget utilities -- gas, electric, water, phone, cable and Internet.
Transportation: Unless you plan on never leaving your house, set money aside for your car payments and public transportation. Of course, you'll also need money for filling up your car, for routine maintenance and more serious problems.
Insurance and health: Be prepared to meet your insurance payments. That means home, auto, life and, especially, health insurance.
Insurance premiums are often the first things to go when money gets tight. They shouldn't be. One of the quickest roads to penury is to let your health insurance lapse and to find yourself with a serious health condition.
Set aside money for routine dental and eye care, prescriptions and any other health expenses your insurance doesn't cover. Once again, if you have pets, put their vet bills on the tab.
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