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2021 money challenge: Establish the right emergency fund for your needs

After you've added up your net worth and get a sense of your spending, it's time to take care of that emergency fund.

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To ring in the New Year, CNBC Select is posting a new money challenge each day for the first week of 2021. Think of these tasks as your financial deep clean, based on expert advice, to help you align your money choices with what you care about most. These are simple tasks, but they do require a commitment. Are you in?

This is day three of seven.

Day Three: Focus on your emergency fund

After you've added up your net worth and gotten a sense of how you spent your money in 2020, it's time to start thinking about your savings. It's smart to prepare for the worst-case scenario like job loss or a big medical bill — the coronavirus pandemic certainly made that clear last year. But even if there's not a global health emergency, it's still good to be prepared to cover the cost of a car repair or broken appliance, which inevitably arise at the worst times.

How much you should put in your emergency fund depends on a few factors. Standard advice says you should have at least three months' worth of savings put aside in a separate bank account that you only touch in emergencies. Other experts say this amount should be as much as one whole year's worth of cash.

However, if you are in debt, you also need to factor in how much you're paying in interest. As you save up your nest egg, you might be delaying other goals like paying off credit cards. If saving three months' worth of cash is going to take a few years, it might be wise to rethink how much you really need.

Statistically, having even just a small nest egg of $1,000 will lower your risk of falling behind when the pipes start to leak or you get a flat tire. A recent report suggests that $2,467 is the magic number to have in your savings account for when disaster strikes. Yet, even just $100 in savings could be the buffer you need to prevent losing heat in the winter, another study finds.

Here are some questions to help you decide how much you might need in an emergency:

  1. Is my job more or less secure? If you feel confident that you won't lose your job, you might be able to get by with a little bit less in reserves when making room for other financial priorities, such as debt payoff.
  2. Do I expect any big expenses in the near future? Evaluate whether your household appliances are in good condition and/or check under your car's hood to see that everything is working properly. That way, you won't be surprised when the day comes for a big repair.
  3. How much credit do I have available to me? If you have existing credit cards or home equity lines of credit, you can turn to them in a pinch. Remember that charging emergencies on borrowed money will come with extra interest costs, so it's not the ideal first choice. It's still good to know all your options.
  4. How is my health? You may have already mapped out any health costs you expect to pay this year in step two as you reviewed your expenses from the past year. But if you are living with a chronic condition, it's good to have extra savings to cover any expensive health-care related costs.
  5. Do I have dependents? Emergency fund sizes are relative to your monthly cost of living, and if you are supporting children and/or dependents, you might want to put more aside.
  6. Do I expect any windfalls in 2021? In 2020, Americans received a stimulus payment of $1,200, and another $600 payment right as the new year arrived. Of course, you can't always anticipate windfalls, but you could plan ahead for expected tax returns, large commissions, employee bonuses or even just birthday cash. Come up with a plan for these windfalls, and if you don't need them for everyday expenses consider putting at least a portion in savings.

Once you've determined how much you want to put in your savings account, you're ready to get started.

Don't get overwhelmed by a big goal. It's OK to start off small and make incremental deposits each week. We estimated that you can put aside $20 per week in order to save $1,000 in a year. Double this to $40 per week ($160 per month), and you'll save $2,000 this year.

Making small deposits might feel insignificant at first, but the best savings accounts don't require a minimum balance to open, like the Synchrony Bank High Yield Savings. You can easily automate a weekly transfer so you don't even have to think twice about making saving a habit.

Alternatively, if weekly savings deposits doesn't work because you get paid on an inconsistent basis, like many freelancers and contractors do, consider doing the opposite. Put your income directly into savings and disperse a biweekly paycheck to yourself from that account.

An 0% APR card can help you save

While it doesn't always feel great to take on debt, using the right credit card can make it a bit more affordable. If an emergency expense comes up, a 0% APR credit card lets you chip away at balance slowly without paying interest charges. Already in debt? You may be able to pay it down faster with a balance transfer card like the U.S. Bank Visa® Platinum Card, which offers no interest for 20 billing cycles on new purchases and balance transfers (then 14.49% - 24.49% variable APR; balances must be transferred within 60 days from account opening). You'll pay a small balance transfer fee, but it can help you save a lot in interest charges.

Check out CNBC Select's list of the best 0% APR credit cards.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.