NEW YORK (MainStreet)Stashing away a few bucks in case of an emergency seems like the sensible thing to do, especially if a curveball heads your way.
If you have a rainy day fund in place, you can tackle the problem easily and avoid jeopardizing your financial security or even credit score. Setting up an emergency cash fund gives you options to replace the broken radiator or take that unexpected trip back home.
Even if you can use your credit card, it's better to use your cash so you can avoid high interest rates or other fees. It's always good to have some cash handy that you can access quickly from your bank.
Starting your emergency fund can be as simple as stashing $50 a month into a savings account, said Nick Drew, a financial advisor for Liberty Partners Financial Services, LLC, based in The Woodlands, Tex.
He recommends that you open an account at another bank or credit union so that the money is "out of sight and out of mind." Automatic debits are one of the best methods, because the money is taken out of your paycheck each month, preventing you from spending it."Just start doing something and increase it every quarter," he said. "People are amazed how they can easily save $50 a month and increase it to $100 a month and wind up with thousands of dollars in savings in less than two years."
While most financial advisors have traditionally advised saving three to six months of your expenses, the downturn in the economy has made some people more cautious.
If you work in a field that experiences frequent turnover, you might consider saving 12 months of expenses, said Drew.
While savings and money market accounts are paying under 1% in interest at traditional banks and even credit unions, a better option is to invest your cash in CDs. Expect a greater yield with a longer maturity.