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The first stepping stone is the creation of an emergency fund. An emergency fund is a sum of money that you have put aside for an emergency (its not so hard is it!). This funds is available if you suffer from a financial shock. A financial shock may occur in the form of a job loss, significant medical expenses, home or auto repairs or something you’ve never dreamed of. The idea is that the emergency fund will allow you to cover these shocks from a cash fund rather than relying on credit cards or consumer loans.

How big should the fund be?

The usual recommendation is that the funds should cover three months of your after tax earnings. If you are self employed this should be extended to cover four to six months of your after tax earnings.

Does this sound like climbing Mount Everest?

Start small…

Don’t worry, just like exercise you will feel better once you have started, and the goal will only get closer! It is a good idea to start small, small amounts of money will add up over time, and as you get used to putting money into your emergency fund you may want to increase the amount that you put away.

Automate…

Organise for an automatic deduction from your paycheck, if you don’t have to transfer the money each time you are more likely not to miss a payment into your Emergency fund.

Forget about it…

The best way to feel good about your emergency fund is to set and forget. Check it once every 3 to 6 months, you will get a nice surprise when you see the balance!