Building an emergency fund is the best thing I've done to recession-proof my finances

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Building an emergency fund is the best thing I've done to recession-proof my finances

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  • I was in college during the last recession and didn't know much about finances, so I wasn't prepared when things went belly-up.
  • Now, though, I know a lot more about managing my money - and I know I need to prepare for the next recession (because it's coming).
  • To protect myself from loss of income, I'm building an emergency fund of at least three months of expenses so I can cover my bills while I get back on my feet.
  • Read more personal finance coverage.

Last time a recession hit, I wasn't prepared. At the time, as a college student who had very little financial education, it felt like it came out of nowhere. 

However, living through it has had a lasting effect on me. For one thing, I learned some important financial lessons that I still keep with me today - including the knowledge that good times won't last forever.

Another recession will come eventually and, from the looks of things, it's coming soon. This time, though, I'm taking steps to prepare myself for the crash.

In particular, I'm working on building an emergency fund, one that will be big enough for me to fall back on in the event that freelancing work becomes hard to find. 

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Conventional wisdom states that a healthy emergency fund is big enough to cover three to six months of expenses, so I'm aiming to grow my fund to that size. In case you're looking to do something similar, here are the steps I'm following to make it happen:

Calculate your monthly expenses

The first step to building an emergency fund is to look at your monthly expenses. Since the goal of an emergency fund is to cover your living expenses for a certain amount of time, you need to think realistically about how much you spend each month.

To do this, start by writing out a list of your essential expenses. These could be anything from housing costs to student loans, credit card payments, or a food budget. 

Then, once you have everything down on paper, go through your bank statements and estimate an average monthly cost for each list item. After you have all the individual costs written down, add them together to find your minimum monthly expenses. 

Next, while it's not required, it can be a good idea to pad your minimum monthly expenses with an extra 10% to 15% to account for discretionary spending. In the event that you ever need to live off your emergency fund for a bit, it's smart to leave yourself a little extra money that can cover unanticipated costs. 

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Let's say, for example, that you have $4,000 in minimum monthly expenses. If you were to leave 10% for discretionary spending, your total monthly expenses would be $4,400. 

Set your savings goals

Once you have a number in mind for your total monthly expenses, think about how big you want your emergency fund to be. Again, three to six months is recommended, but it can be as big or as small as you'd like. 

Multiply your monthly expenses by the number of months that you'd like your fund to cover and keep that amount in mind as your total savings goal.

In the above example, if you wanted an emergency fund big enough to cover three months, you would calculate $4,400 x 3 = $13,200 as a total savings goal.

Then, break your total savings goal down into bite-sized action steps. Take a look at your income and decide on an amount that you can afford to contribute toward building your emergency fund each month. Make that your monthly savings goal.

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For this example, let's say that you can afford to set aside $1,000 per month.

Open a separate savings account

When you're saving toward a specific goal, it can be helpful to open a separate savings account for it. Put simply, if all your money goes into one account, it's far too easy to lose track of how much you've saved. It's also easy to slip up on your goals and spend that money on unintended purchases. 

On the other hand, if you have a separate account that's dedicated to your emergency fund, you'll be able to easily see how much is in it at any given moment and keep track of the progress you're making while building it up. 

You'll also be less likely to pull from the account the next time you need some quick cash.   

Contribute on a schedule

The last step to creating an emergency fund is actually building it. You can do this by adding the amount of money you decided upon for your monthly savings goal into your new account regularly.

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 Since I generally get paid monthly as a freelance writer, I contribute to my emergency fund once a month. 

However, if you get paid biweekly, you can feel free to break your monthly savings goal down into two deposits. 

The important thing is to get yourself in the habit of contributing to your emergency fund on a set schedule.

If, in the example, you can afford to put $1,000 per month toward that total savings goal of $13,200, it would take you just over a year to build your emergency fund.

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