One of the basic steps in any personal finance resource I read is to establish an emergency fund once you’ve got your necessities paid up and debt payments going properly. The idea is to have enough cash on hand to cover unexpected occurences, e.g. the stuff that normally happens in life when you least want it to. The fund is what you dip into rather than putting it on a credit card, for example.
I typically see three to six months worth of expenses as the standard amount listed by various authorities. However, I’ve never been much of a saver and don’t have much to start with. If you’re like me, you should start small and work up from there. A good start might be $10-$20 a week and then bumping it up every so often once you’ve gotten comfortable with that amount. Try to get to at least one month of expenses and work your way up from there.
Two things to note about the emergency fund:
It’s for emergencies! Not for vacation or Christmas gifts. Real emergencies might include a medical emergency, job loss, or a car breakdown. Keep the cash off-limits except in those (hopefully) rare occurrences.
Earn interest on it. You may want to keep it in something like an ING Direct Orange Savings account, but find something with a decent rate that doesn’t lock down your money for a specific period. You’ll need relatively quick access to it in an emergency, after all, so a 6 month CD is probably not a good choice.
Once you’ve got that first month down, try to work your way up to the six month mark. I’m going to try an incremental approach of one month at a time and see how it goes.