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Rainy Day Fund Keeps Anxiety at Bay

By Peter McDougall

There's plenty of uncertainty in the economy these days.

Companies such as Toyota (TM) and Ford (F) are cutting back on production, while others including Sony (SNE) and AT&T (T) are slashing jobs. Times like these are when it's especially important to take stock of your financial situation. Specifically, take a look at how much you have set aside for a rainy day.

Most financial advisers agree that consumers should set aside between three and six months of expenses in the event you lose your job, incur unexpected medical expenses or otherwise end up short of cash. Here are some tips to setting up your own rainy day fund.

Build a budget: Figure out what you spend every month on essential expenses such as rent or mortgage payments, food and medical costs, car payments and health insurance premiums. Multiplying those expenses by the number of months you want your cash cushion to cover will provide a target amount for your emergency savings.

Plot a savings timeline: Using the’s Emergency Savings calculator, calculate how long it will take to reach your savings goal. To start, enter your average monthly expenses and an estimate for potential emergency expenses into the calculator and pick the number of months’ worth of funds you want to set aside.

For example: Say you have $2,500 in essential monthly expenses and want to save enough to cover six months of those costs. You also want to set aside an additional $2,000 in case of unforeseen medical costs along with $500 for insurance deductibles. If you can afford to save $200 a month in an account that offers an annual interest rate of 2%, it will take just under seven years to save the necessary funds.

Change the parameters: Play around with different scenarios to see what you can do to speed up your savings timeline. Consider taking a two-stage approach to setting up your fund. Increase the amount per month you set aside until you have three months’ worth of expenses -- the minimum recommended amount of savings -- then ease back on your way to saving up the full six months’ worth. It'll take you two years and nine months to save three months’ worth of expenses if you can set aside $300 a month instead of $200. If you drop your savings down to $200 a month after that, it will take another two years and 11 months to save up all six months’ worth.

Choose the right account: An easy way to speed up your savings timeline is to earn the best interest rate possible on your money. A regular savings account carries an average rate of just 0.37%, whereas higher-yielding money market accounts (MMAs) average twice that at 0.79%. But rates vary widely among banks and credit unions, so it's worth shopping around. For instance, investors in the New York metropolitan area can find rates such as 3.4% at Intervest National Bank and 2.25% at Sovereign Bank. To look for rates available in your area, enter your ZIP code in's money market section.

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