“ I have not prepared for an emergency. Just last year, I had a spur-of-the-moment accident and was hospitalized. Without insurance, I had to pay out-of-pocket — I asked my parents for the money. I wish I’d had some savings to fall back on.
I do now.”  ~Haran

Living paycheck-to-paycheck means being vulnerable to unexpected, but often necessary, expenses. When you don't have emergency savings, one little setback can put you on the brink of financial ruin.

For most people, the rule of thumb is to keep enough savings on hand to cover at least three to six months’ worth of expenses. The exact number varies according to personal factors like your job security and other risks. You don’t want to rely on more debt or cashing out your retirement savings in order to cover an emergency.

How to have an emergency fund

The hardest part is getting the fund together from scratch when you don’t have it. But once it’s there, you can have peace-of-mind knowing there’s a cash cushion to break a fall.

Do it in three basic steps:

• Plan ahead and prepare.

You can't predict major financial setbacks, but you can understand common things that cost a lot. A health problem, housing repair, natural disaster, auto accident, lay-off, family illness or death, identity theft — all of these are things that you have little control over, but which could cost you a lot if you're not prepared. You need to make sure that you have enough insurance and that you periodically check your credit report for signs of fraud.

• See also: Credit report

• Set the right amount for your emergency fund.

In the beginning, your emergency fund should be enough to give you a small cushion in your bank account at the end of every pay cycle. We recommend building up to $1,000 to start, which is the same as saving about $19 dollars per week for a year. That will cover a lot of car, medical or home accidents that might come up.

As you start to earn and save more, we recommend adding up all your expenses — rent, groceries, utilities, transportation costs like car payments and insurance — and saving up enough money to cover at least three to six months of these expenses. If you own a home, have a family or aren’t stable in your job, you’ll want to save more. Start by storing your buffer in your checking account. After you have your $1,000 safety net, you can start putting more emergency funds in a savings account. Once your money really starts to grow, you’ll want to consider other investment options. The key is to start saving and leave this fund alone unless you actually have an emergency.

• See also: Emergency funds

• Automate your emergency savings.

As with any other kind of saving, we recommend that you set up automatic transfer of any emergency fund money from your checking account into savings account until you reach your goal of three to six months' worth of expenses, or more. After that, you can stop contributing, as long as you don't touch the money. If you end up using it for an emergency or for another reason, make sure that you put back into emergency savings what you took out. Try not to fall under that three months' of expenses threshold. And, if you're lifestyle gets more expensive, remember to increase your emergency fund amount.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Revisit this Essential during these Life Events

These life events are great chances for you to look at your emergency savings and make sure you have enough or are budgeting to save up:

• Starting a job
• Leaving a job
• Getting married
• Starting a family

Next up: Save at least 10%

You've mastered this lesson, so now it's time to learn about save at least 10%.