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One of the first lessons that I teach in my book, The Confident Investor, is that you need to have an Emergency Savings fund to tide you over when bad things happen to you and those you love.

Every investor should put 10% of your earnings into a savings account at the bank immediately, preferably before you even touch your wages. Most employers now offer automatic deposit of your check into as many bank accounts as you wish. Set up your direct deposit so that 10% of your earnings goes into a different account to that in which you normally keep your money. Do not touch that account to pay the bills unless calamity has beset you or your family. This is the cushion to keep you financially secure.

That savings account needs to build up to the equivalent of six months of your after-savings and charity income to help you in case life deals you a tough hand, such as:

• If you lose your job.
• If someone in your family is diagnosed with a medical condition.
• If some catastrophe happens to you or someone you care about.

You will need those 6 months of income to give you a soft landing while you put your life back together.

If you have nothing saved right now, simple math tells you that it will take you 48 months to save up this cushion. The interest does not count here since the interest on a savings account will barely keep up with inflation.

Once you have accomplished that minimum goal, then you can begin to invest.

To calculate how long you need to generate this savings, let’s do a simple example. Assume that your after-tax income is $50,000 per year.  You will want to have 6 months or half that annual number in cash savings. In this example, that is $25,000. If you have no savings today, you will need to be diligent about building up that cash. It won’t be easy but nothing worthwhile is easy. If you save 10% of your after-tax income to that savings account then you will put $5,000 per year into that account.  It will take you 5 years of saving $5,000 per year to accumulate $25,000.

Your should only start investing money in the stock market after you have built up your emergency savings to a 6-month cushion. Once you have that cushion, you will be very comfortable in your life as you know that you can weather any major calamity that befalls you. You will be able to redirect that 10% savings to your investment fund after you have built up your Emergency Savings fund. That 10% will be the money that you will use to invest in the stock market using the tools that you learn in my book, The Confident Investor.

If you already have some money in savings, you will hit the goal of 6 months even faster. If you have purchased my book, The Confident Investor and registered on this site you can download a worksheet that will help you with this calculation. I am sorry but this worksheet is only available for registered readers of my book (it is free to register once you have the book).
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The worksheet is available here.

Note to readers of book.  There is an error in the book that missed editorial review.  It takes 60 months to save for a 6-month Emergency Fund if you have nothing set aside and you are only saving 10% of your income. In the book, I erroneously put 48 months. I apologize for the error. This error will be corrected in the 2nd edition of the book.
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You might wonder if your credit cards could be used as an emergency fund.

Unfortunately, the answer is not clear cut, but it depends on your immediate situation. Basically, if you need a loan to cover your needs,  you should avoid the loan. If you don’t need a loan, then the loan is probably a decent thing.

Remember, your credit card is nothing more than a short-term loan for the balance of the month until your next bill. It is when you start to use short term credit card loans for a long time that you begin to have problems.

Too many people are already in credit card debt. This is likely costing them a great deal of income in interest. That interest is taking away from their ability to invest for the future.

If you carry a credit card balance,  adding an emergency charge will not help your situation in the long run.  You can do some substantial damage to your finances and your credit score.  You’ll probably end up paying interest on the charges, and you’re credit score will be hurt since you’re using more of your available credit.

On the other hand, if you have an emergency fund put away and you pay your credit card balances in full every month then using your credit card in an emergency is just a short-term bridge loan with no interest.  You can use the card then pay it off in full with your emergency savings.

Taking on additional debt to get you out of an emergency situation is not optimal. I understand if you must do it to get yourself out of a bad situation as that is the reason for the emergency fund. It is far better if you start today to build your emergency fund so that your credit card is simply a 30-day interest free loan.

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Editor’s Note: Dealing with current debt is a reality for many people. The challenge is to eliminate debt and at the same time grow your personal investment portfolio. Alanna does a great job of dealing with this issue.

In May of this year, the Federal Reserve Bank of New York reported that U.S. consumer debt totaled $11.23 trillion. If you are examining your personal financial situation to handle your share of this debt, you are taking the right step.

Managing your income properly requires an approach that is threefold, as you must look at what you owe today, how emergencies can impact your life and what you will be able to invest in to achieve retirement goals.

1. Handle high interest debt immediately. Credit card debt or loans with high interest rates have a tendency to drain even a solid income. Ignoring these debts or taking a haphazard approach to on-time payments can allow the problem to worsen, costing you more and more in interest and late fees. Start by making minimum payments on all the accounts you owe to put the accounts in good standing, which can eventually help your credit score improve.

There are two main schools of thought on which debts to pay off first, but there is a principle we can glean from both of them. One recommends paying off the account with the lowest balance first, which can seem easier and decreases the amount of open negative accounts. The other recommends paying off the account with the higher interest rate first.

Both of these strategies improve debt management as they approach debts by focusing on a specific problem and making an effort to pay more than the minimum payment on an account.

2. Put Together An Emergency Fund

Having savings for retirement is a goal to work toward after you have made a dent in your debt. Right now though, build up an emergency savings account of at least 3 months of after tax income. Your intention is to get out of debt and stay out of debt, so you need a cushion to soften any unexpected financial crisis.

Vehicles may suddenly require expensive maintenance. Costly medical issues can disrupt your life out of nowhere. You may encounter periods of unemployment or face increasing monthly rental payments. Being able to turn to an emergency fund in any of these situations can keep you from relying on credit or having to skip making your monthly loan payments.

3. Profit from Your Discretionary Income

Your discretionary income consists of the money you have after basic living expenses are subtracted based on the poverty line. What this means is taking your paycheck, subtracting regular necessary costs, then looking at what remains.

Once you have accomplished the goals of regularly paying on debts (including paying more on at least on accounts) and building an emergency account, you can pursue investing in any extra money from your discretionary income into savings.

You can begin with a traditional savings account that will earn a percentage on the money you deposit into it and also see what programs your job has to offer. There may be a 401(k) or other type of retirement account that will increase at a more rapid rate than your bank offers.

Research all of these options, while realistically considering how much you will be able to consistently set aside every paycheck.

Alanna Ritchie is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.

On a regular basis, I talk about paying yourself first. I discuss it in my book, The Confident Investor, and I have mentioned it on my site multiple times. I was very impressed with Philip Taylor and his article on the subject. What he said was 100% accurate and everyone should follow his advice.

He points out that paying yourself first is essential for doing the following:

1. Want to get out of debt?
2. Want to have an emergency fund?
3. Want to have money to set aside for a down payment or a vacation?
4. Want to afford retirement one day?
5. Want to give your kids some money for college?

I personally think that just paying yourself first is not enough to retire comfortably. You need to have a plan that increases that savings faster than the market grows. That is where my book, The Confident Investor, teaches you to grow that savings. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

Jump over and read Mr. Taylor’s advice. Start paying yourself first so that you can start investing. After you have developed a bit of a nest egg, you can start investing by following the advice of my book.