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How to start an emergency fund when you live paycheck to paycheck

CNBC logo CNBC 9/10/2019 Jill Cornfield

When things go sideways, as they inevitably will, you'll need cash.

That's what the rainy day fund — aka the emergency fund, savings pool or cash stash — is all about.

Generally, the rule of thumb is three to six months' expenses. Some experts even recommend tucking away even more.

Is that even possible?

Less than zero?

Don't be put off by the daunting numbers. Your goal should be to start establishing savings earmarked just for emergencies.

Chartered financial analyst Leslie Thompson, managing principal of Spectrum Management Group at Carson Wealth in Indianapolis, recommends people save up six months of salary — but she means after taxes and other expenses are withheld.

Here's how to prioritize: First, work on reducing debt. Second, work on building up a safety cushion. Long-term savings is No. 3, Thompson says.

Part of the goal is not the actual money. "It's building up the discipline to save money," Thompson said. Set an auto payment through your bank, or try an app like Tip Yourself to stash money, which is free to use. Most major banks and credit unions have auto save features. Other apps may be handy but they do charge fees.

If you have nothing saved and think the higher levels are impossible, set a lower goal, like $500.

Or get started by taking your largest monthly expense, whether rent or your student loan, and saving up that amount. When you've achieved that, double it.

How much you really need

The boilerplate advice can be demotivating, says Priya Malani, a founding partner at financial planning firm Stash Wealth in New York. Her firm has been pushing against the conventional standards for emergency funds for some time.

People frequently recommend a fixed amount, such as $10,000, or a few months' of living expenses. The rules of thumb may not work for everyone, Malani says. Instead, she prefers fine-tuning these guidelines.

"Your emergency fund should equal three months' of your fixed expenses," Malani said.

These are different from your living expenses: They're the things you cannot turn off immediately if life is suddenly upended. "You should include regular pet care and child care in your fixed expense numbers if you pay them every month," Malani said.

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Gig your way through

If your emergency cash need isn't too great, you might be able to fill in the gap with a side hustle, says Vicki Salemi, a career expert at Monster.com in New York.

Gig economy work is easier when you're younger. You have fewer financial obligations, Salemi says, so scout what you need to earn between jobs and see what you can cut, such as a gym membership. Make sure to account for COBRA health insurance payments if you are not still on your parents' plan.

Younger millennials may not absolutely need six months' living expenses, Salemi says. "You can move around or couch surf for a while," Salemi said. "You're used to dorm living, anyway."

They might be able to move back in with their parents for a while in case of a job loss, where people in their 50s might have a mortgage and college tuition to pay. That makes the need for emergency savings more critical.

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If all else fails

If you need motivation, imagine a situation — health care or home problems are most common, Thompson says — where you need cash but don't have it.

If it's a health crisis, people can often negotiate with the hospital for a reduced amount and an installment plan to pay off the balance. But other situations might not be that flexible.

You might have to work out something with a contractor or a vendor, if it's a house-related bill, Thompson says. "Otherwise, people tend to fall into credit card debt, which is not great."

Though far from ideal, she suggests considering a loan from your 401(k). Most plans do offer loans, though some do not.

The right percentage

"Emergencies come in all different shapes and sizes," Malani said. Some can be fixed with extra pocket cash from a quick stint with a gig job and others can't. She has seen clients whose pets were diagnosed with cancer and needed chemo treatments right away.

It might be easier to frame your savings decision as a percentage of income. "Instead of saying you need $10,000 in savings, it would help to say ideally you should be saving 10% of your income," Malani said. "It's more digestible and therefore motivating. "

CHECK OUT: 5 questions to ask yourself before buying a home, even if you can afford a down payment via Grow with Acorns+CNBC.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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