Things happen unexpectedly which leaves us with expenses that we did not plan for. This might be due to a relative being sick in another country and you have to take an unexpected trip or for medical bills due to an illness. The fact is that you will incur debts if you have such unexpected events. So, it is imperative that you have some money on hand that will provide you with a cushion if some of these things occur.

An emergency fund is money that is set aside for emergency purposes. It is money that is not to use for any other purpose. Even if you’re experiencing bad time, setting up an emergency fund is imperative. You need to do this by setting aside a part of your income on a consistent basis for this purpose only. In order for you to be successful at setting up your fund, you must set aside this money just for the emergency and not use it for other things that you might need.

Your emergency funds should be at least equal to three months’ worth of living expenses. This is not the same thing as three months’ worth of salary. It should be enough that you can cover expenses brought about by an emergency.

It is quite easy to figure out how much money you need for your fund. You should take in account your expenses like rent, bills, food and all expenses that you would normally cover in a month. Experts have determined that if people are unable to work due to an illness, they are usually unable to return to work for at least three months because it takes that long to recover.

Another thing to keep in mind is that you should have quick access to your emergency fund. This means that you should not put it in a long term investments. There is a danger that you may want to use your emergency money to go shopping or to buy something that your family needs but you really have to exercise some self-control because your emergency fund is not to be used for anything but emergencies.

Rather than keep your emergency funds around the house so that you will be tempted to spend it, you should keep your funds in a saving account or even a money market fund.

What are Money Market Funds?

A money market fund is a type of liquid investment that you can purchase through your bank or even a mutual fund. There might be other types of funds that you can easily access that are available. Money market funds offer a little higher interest rate than your regular saving account so you will be earning a little more money if you do this.

What about Savings Account or Certificate of Deposits?

You can even put your emergency fund in a savings account or any other asset that you can easily liquidate without penalties. There are some Certificates of Deposits that meet these criteria so these should also be considered. You can even split up your emergency fund. You can put some of it in a certificate of deposit, some in a money market fund and the balance in a savings account. Or, you can put all of the money into a certificate of deposit because you will get a better interest rate and put it back into a certificate of deposit when it matures or put it into a saving account when it mature. The choice is yours.

Just remember that the term of a certificate of deposit determines the interest rate so if the term is long it means that you will earn a higher interest rate. Also keep in mind that the purpose of the fund is for emergencies so, in any event, you really do not want to tie up your money for long period of time because you will not be able to access it when you need it. If you follow, these money saving tips, you will have accumulated enough money in your emergency fund in no time.