Step 1: Start Building Your Emergency Fund
Clunkity-clunk-clunk. Your car has been making that noise for months and needs to be fixed. The problem? You don’t have any liquid cash for repairs. That’s why establishing a rainy-day fund should be your number one objective. Given the still fragile economy and the rocky job market, you need to have a cushion in case you are hit with a loss of income or face an unforeseen expenditure. Don’t assume that you can skip this step and use your credit card instead. “Ten years ago, you could have. But with the recent tightening of credit, you could easily get in a bind that costs more than what you can charge,” says DeDe Jones, a financial planner in Denver. (And, ideally, you shouldn’t take on any high-interest credit-card debt, either.) Begin by setting aside 5 to 15 percent of your income until you have squirreled away enough to establish your emergency fund. It should cover one to two months of your bare-bones budget—what you need for basic expenses, such as utilities, groceries, and the mortgage or rent (not after-work drinks or a Netflix subscription). Each time you get paid, have this money deposited into a dedicated savings account or a money-market account. (Find some of the best interest rates at IngDirect.com and SmartyPig.com, an online bank that focuses on setting financial goals.) And if you think you’ll be tempted to blow your stash on, say, a smart new bag, place this money in an account that isn’t linked to an ATM.