How to Budget for Emergencies

Having an emergency fund can take some of the stress out of unexpected home repair bills.

Calculate Your Emergency Savings Goal

There isn't a magic amount that applies to everyone when it comes to how much you should set aside. "I recommend three to six months of living expenses," advises Baehr. "More if your job or health situation is not stable." For example, if you work as a freelancer or do primarily contract work, you need a larger emergency fund than if you're the picture of perfect health and have a stable job at a strong company. Of course, to know how much several months' worth of living expenses actually is, you need to track your spending.

Budget for Monthly Savings

Calculate how much you need to set aside each month for your emergency fund by dividing your goal by the number of months you want to spend to reach it. For example, if your goal is to have $6,000 set aside in one year, divide $6,000 by 12 months to find you need to find an extra $500 each month in your budget. While you're building your fund, cut back on discretionary spending, like eating out or luxury purchases, knowing that you can return funding to those categories once you've protected yourself from future financial troubles.

Motivate Yourself to Save

Even the best laid plans can get off track if you're not motivated to stay on target, so you should remind yourself why your emergency fund is so important. "You can quickly accrue credit card debt, trying to keep up," warns Baehr. "In addition you may face late fees and penalties, collections, and a hit to your credit, making credit more expensive for you in the future." But don't limit yourself to negative motivation. Remember the peace of mind that comes with knowing your car breaking down or your child getting sick isn't the end of your financial world. And, to top it off, think of how you can use the money you're setting aside each month once you've reached your savings goal.

Where to Store Emergency Cash

One way to help keep your hand out of the cookie jar when it comes to your emergency fund is to set up a separate account. Baehr suggests having a separate bank account that is linked to your checking account, but one that is not set up for instant transfers. "Online banks are helpful that way, because they are out of sight, out of mind, and usually earn a better interest rate, too," she says. In addition, you can set up automatic transfers to the separate account so each month (or paycheck), you can have your savings goal automatically added to your emergency fund without having to think about it.