Building Up Your Cash Cache

Other key considerations include the number of income earners in the household (the fewer there are, the higher your reserve timeline should be).

One of the best ways to get started is to funnel a set amount from your paycheck into a savings account or short-term investment option. Ten percent of every paycheck is a rule of thumb, but don’t be afraid to start small, for instance, 3%, and then work your way up to that ideal amount.

“I encourage people to be aggressive during the funding phase,” advises Robert Gordon, senior financial adviser at Investor Solutions in Miami. “Ten percent from every paycheck may hurt at first, but if you’re not aggressive you won’t reach your goal.” Treat your emergency fund like a bill you pay each month. Also, see it as a kind of insurance against unexpected expenses, not as a source to tap when you want to go shopping or out to dinner.

With savings rates hovering in the 1% range, getting a good return on an emergency fund–which has to be accessible–isn’t easy. Once a few months’ reserve is saved, Winfrey suggests keeping one month’s worth in an interest-bearing account (for quick access) or a high yield money market account and the rest in short-term CD options.

Include laddered CD portfolios, whereby you invest in CDs with various maturity dates ranging from three months to six months to a year, and that are renewable if the money isn’t immediately needed. “When you use this approach you’ll earn a little bit better than the cash rate of return,” says Gordon, “but you’ll still have access to the money on a rolling basis.” Check Bankrate.com to find the best CD rates nationwide.

Short-term bond mutual funds, which typically have maturity dates of two years or less, are another good option. Look for funds with A, AA, or AAA ratings, says Gordon, who suggests allocating an emergency fund as follows: 1/3 to a regular savings account, 1/3 to a laddered CD portfolio, and 1/3 to short-term bond mutual funds. “You’ll have enough liquid funds to cover emergency expenses,” he says, “and the rest will be earning somewhat higher rates of return while still offering safety and liquidity.”

Perry says rebuilding her emergency fund is well worth the pain of allocating a percentage of her paycheck to the cause. “When you’re in a lifestyle where there’s no ‘extra’ money and your accounts hover around negative territory, it’s frightening,” she says. “I went from having no buying power to having control over my finances. It’s been a real blessing.”