How to Build and Invest an Emergency Fund

Some people use lines of credit as an emergency fund, however, because of the current "credit crisis", many are realizing that using debt during an emergency only makes the emergency last longer and creates its own emergency once the debt is due. (Furthermore, the bank may cut your credit limit during an emergency, since they realize you are less likely to be able to pay it back.) Here's how to do an emergency fund the real way - with money!

	Get on a written monthly budget so you know where the money is coming from and where it is going. You want to designate where the money goes before the month begins, rather than trying to chase it down once the month is over.
	Open an online savings account for a reputable bank, or open a savings account or second checking account at your current bank. Trying to avoid accounts with fees. Some no-fee, high-interest online savings accounts are offered by banks like: ING Direct, FNBO Direct, HSBC Direct, Emigrant Direct, iGoSavings, and E*Trade Bank, among many others.
	Save up $1000 as quickly as you can. Squeeze every dollar you can out of the budget. Sell stuff you don't need. This is a starter emergency fund and will provide you with a basic buffer.
	Get out of all consumer debt (credit cards, student loans, cars - everything but the mortgage). List your debts smallest to largest payoff balance and pay minimum payments on all debts but the smallest, and pay off the smallest as quickly as you can. Repeat until all debts are gone. If you land in an emergency, you don't want to deal with creditors too!
	Calculate how much 6 months of living expenses would be. Since you have a budget, you know how much that is. Food is a living expense, but retirement savings is not. Gasoline is a living expense, but entertainment spending is not. Your mortgage is a living expense, but upgrading your kitchen is not. Once you figure out your monthly living expenses, multiply that amount by 6 to get your goal amount for your emergency fund.
	Since you have no consumer debt, you will have plenty of cash flow to build up your emergency fund. Put in as much as you can each month until you reach the goal of 6 months of living expenses. Then you're done!