by Jack Thornton

Created on: August 29, 2007

What would you do if your furnace died in the middle of the winter or if your car started smoking when you got in to go to work one morning? Most people would get the problem fixed and add the expense to their credit card.

Not a great solution, considering how many of us carry a credit card balance from month to month. Not only do you have an unexpected expense, but you are now paying 12-20% interest on that expense.

What to do about it? The answer is to establish a reserve to use in those situations. This is often called an emergency fund. The purpose is to be nothing more than a repository of liquid funds that can be used for unexpected expenses that cannot be put off.

How to start

It is important to start with what you can. Even just $50 or $100 in an emergency fund can make a difference. More than that needs to be the goal, but every dollar that you can put into an emergency fund is that much bigger of an emergency that can be handled without resorting to debt or other funding.

It can be as simple as depositing 1% of you paycheck into a new account to act as your emergency fund. That will grow your emergency fund over time, and if you can afford to save more than 1%, it will grow even faster.

Other ways can include cutting back on expenses and saving the difference or selling items that you do not need or use from around your house. If you want to quickly build your emergency fund, a part-time job also becomes an option.

The trick is to start with something substantial, sustainable or both. Once the emergency fund is started, you will have taken a positive, visible, concrete step towards getting or keeping control of your financial life.

How big

There are a lot of recommendation for how big your emergency fund should be. Numbers from 3 to 6 months of living expenses are often bandied about as appropriate for everybody. Others provide concrete numbers like $1000 minimum or $5000 or more. Yet, there is no magic number or formula that will work for everybody.

The real key to how big it should be is what level of emergencies are you likely to face and how prepared will you need to be to handle it? For example, if you are single, rent your apartment, and have no dependents, your emergency fund does not need to be very big. A couple of months of food, rent, and bills is likely enough.

Why? Losing you job is likely to be the biggest financial emergency you will encounter. Being on your own gives you the flexibility to get another job relatively quickly, even if it means

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