A Tax Fact from The Tax Institute at H&R Block

Emergencies come in all shapes and sizes – from the unexpected car repair to the dreaded loss of full-time employment that so many American workers are experiencing today. Perhaps the only certainty in life is to expect the unexpected, and be prepared. This is where an emergency fund comes in handy.

So does size really matter?
The general consensus among financial experts is that three to six months of your typical living expenses (mortgage or rent, utilities, insurance, etc.)  - and spending - should be in your emergency fund.

With today's high unemployment rate and the decline in employment opportunities in many job sectors, it may be prudent, however, to increase your emergency fund to cover a longer period of time.

The hardest part may be to start
You know you should have an emergency fund, but how can you possibly earmark any of those precious little dollars from your salary for an emergency fund instead of for daily living expenses?

Well, it may be difficult to start, but as the saying goes, 'when times get tough, the tough get going.'

The first step is to track where all your money goes every month – how much is for necessities like the roof over your head and your auto, and how much falls into the 'I don't need it, but I gotta have it' column?  You may be surprised; you can start small, but just start. Begin by putting the money you spend every day on that drive-through latte or lunch at the fast-food restaurant, into a savings account. Start and do it regularly. Pay yourself first before you reward yourself with little luxuries. You don’t really miss it, do you?

Now start increasing the contributions to your emergency fund – after all, you need a minimum of three months, and in the current job environment, probably six months to cover expenses during employment loss. And, even if you consider yourself and your job recession proof, you still need an emergency fund. After all, an emergency fund can also be used to take advantage of opportunities too.

Should you halt retirement savings in favor of an emergency fund?
This is a personal decision, but always contribute to your retirement savings up to, at the very least, your employer’s 401(k) match. Once your emergency fund has adequate monies to tide you and your family over in the event of a job loss, up your contribution to your retirement account as quickly as possible.

Where should you keep your emergency fund?
The whole premise behind having an emergency fund is that you need to be able to easily access the fund should an emergency strike. Savings accounts, though a good choice when first stating, generally offer interest rates that are extremely low. And though an emergency fund shouldn’t be about yield, it is a major plus if the money you have earmarked for an emergency actually grows too.

Financial experts agree that for liquidity, safety and yield, the best options once your emergency fund grows to a three- to six-months size is a bank money market account and a high-yield savings account, both of which are FDIC-insured up to $250,000 per account (effective through December 31, 2009 when it will revert back to $100,000 per account), or a money-market mutual fund.

Whatever choice you make, take comfort in knowing that now that you have an emergency fund, you'll be prepared to face and challenge with less worry as to how you will meet your monthly expenditures.

Our Blog: Before you touch your 401 (k), just know what you're in for 
So you don't have an emergency fund, and you're now among the masses of unemployed.  And your 401 (k) is sitting there losing money every quarter.  Should you touch it? Know what you're in for, first.  Check out our blog and let us know what you would do . . . or have done in a similar situation. We want to hear from you.