How-To Guide: Create a Cash Cushion

Emergencies happen. You might as well plan for them. Whether it's a temporary job loss or an unexpectedly high orthodontist bill, having some cash on hand will cushion the financial blow.

Creating a cash cushion for planned expenses is also a good idea. So to help you on the path toward financial stability, we've taken a couple of useful PDF worksheets from the Fool's old personal-finance service, TMF Green Light. Let's figure out what you need to stash, and start saving!

1. Consider your risk and responsibility.
Do you have dependents? Is your job stable?

2. Figure out your essential expenses.
The rule of thumb about having three to six months of expenses set aside is a good place to start. But why not take 10 minutes to come up with your exact emergency savings amount? Use the PDF-format "Set Two Savings Goals" worksheet for this step and the next one.

3. Calculate your short-term cash needs.
For expenses coming up in the next three, five, or seven years (depending on your risk tolerance), you don't want your money in the stock market. Trust us ... stocks are too volatile to risk your short-term cash. The "Set Two Savings Goals" worksheet will also help you assess your upcoming cash needs and come up with a monthly savings amount to meet them.

4. Get the best return on your emergency savings.
Mingling your emergency and short-term savings with your checking account puts your savings at risk. Instead, keep this money separate -- and get a better return on your cash, as well. The "Put Your Short-Term Savings to Work" worksheet (also in PDF format) will organize your savings-account shopping -- taking into account liquidity, interest rates, risk, and account costs -- so you can find the best return for your bucks.