Keeping your personal finance in order is not something that is an easy task. Personal finance disasters can sneak up on you. Sometimes an emergency expense can mess up your budget so badly that you have to take months to get things back in order.

To help prevent emergency expenses or other unexpected situations from blowing your personal finance out of order you need to develop something called an emergency fund. An emergency fund is basically a savings that is used only in case of emergencies.

Importance of an Emergency Fund

The idea of an emergency fund is basically to help prepare you for extreme situations such as the loss of a job. An emergency fund should ideally be something you could live off of for at least three months if you were to suddenly lose your income.

However, an emergency fund can also be something you can dip into should you have an unexpected expense. The whole point is that you have this extra money there if you should need it for something important that does not fit into the budget.

An emergency fund is not a savings account you can use to make special purchases. It is important to understand and maintain that the emergency account is only for emergency situations.

Make a Budget

To start setting up your emergency fund you need to establish a budget. This will help you to learn about your expenses and be able to set up the amount of the emergency fund.

A budget will also help you when it comes to deciding how much money to put in the fund every month. Be honest with your budget.

Find Out How Much You Need

You will want to consult your budget for how much you will need in an emergency fund. You want to make sure that the fund's total amount would allow you to live for at least three months.

Of course you can feel free to save above that amount, but shooting for a goal of three month's living expenses is a good place to start. Always remember, too, that when you take any money out of the account that you need to put that amount back.

When deciding you may want to consider extra expenses and if you want to include those in your emergency fund. If you fall on tough times you may end up deciding to forego extra expenses like cable television or weekly night out. Or you may still want to keep those things. Just make sure you come to an honest amount that you could really off of if you needed to.

Build Your Fund

Once you have decided how much you need in an emergency fund and how much you will add to it each month the only thing left to do is start saving. Make sure you choose an account that will pay you a good amount of interest and be a secure place to keep this money.

You should be able to build up an emergency account rather quickly which will help to ease your mind about what you would do in an emergency situation. You will know that you have that emergency account to help you keep your personal finance safe and stable.

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Establishing An Emergency Fund

Most people don't want to think about finances because of the stress and frustration it causes. In fact, if you're married or in a common-law relationship, finances rank as one of the bigger causes of stress on the relationship. Often, facing this bad news just makes people more overwhelmed and leaves them feeling helpless. And in the end, we succumb to their power and simply ignore them. However, it is important to establish a good rapport with your finances.

If certain financial pundits prove correct, the health of the economy could be getting worse. At the same time, the economy is always in flux and demands your constant attention. In any case, it pays to have a plan in place no matter how the cards play out, and the first item on your financial agenda should be setting up an emergency fund for any and all unforeseen turbulence. This is best way to rekindle your rocky relationship with your finances.

What is an emergency fund?

It doesn't take a sophisticated financial guru to explain what an emergency fund is. But, understanding the purpose of an emergency fund is essential to avoiding financial hurdles that you'll surely encounter in your lifetime. Let's be as blunt as possible in explaining an emergency fund: It's a separate account that is set aside for emergencies. That definition is so simple that a first grader could understand it. The money can be stored in various places -- your grandmother probably kept hers between the mattress and box spring -- but the important thing is to keep the money safe for a time of need. And this is what makes an emergency fund different from a "rainy-day" fund.

Why do I need an emergency fund?

Creating a sufficient emergency fund is the cornerstone of any financial plan and it is an important first step. Financial experts recommend that you put away anywhere from three to six months worth of expenses. However, each person is different -- they have different jobs, job security, comfort levels, and lifestyles. This is where the elbow grease comes into play since you'll have to sit down and sift through your monthly bills to figure out expenses. Now, if you've already established a budget for yourself, this should be familiar territory. Here are some things you'll need to consider: grocery bills, car payments, rent or mortgage payments, internet access and cable, and your electric and water bills.

There are many reasons that describe the need for an emergency fund. Small things like not being able to get money from an ATM due to a power outage to larger issues such as medical bills or extensive auto maintenance. Any financial reasons that come as a shock or surprise and cause an inconvenience are reasons for your emergency fund.

Where to stash your emergency fund

There are many places to store the cash in your emergency fund: Firstly, the money has to be in a safe place, where you can get to it, fast. Furthermore, the money has to have the ability to be quickly converted into cash without a loss, which is known as liquidity.

One of the most basic ways to store the money is to put the cash in a jar. Storing a couple hundred dollars in twenty-dollar bills is a good idea in case of a sudden emergency -- but if the amount is substantial and there's a fire or you get robbed, you'll be up the creek. For these types of situations, it's preferable to store your emergency fund in a checking account. This is the most liquid, but doesn't provide much interest, if any, on the money. Therefore, a savings account is a better choice because it is liquid and pays higher interest on the money. Other options include a money market mutual fund or even a certificate of deposit.

Some people don't have extra cash to place into an emergency fund. In this case, using a credit card for emergencies could be an option. However, paying off the entire balance in full is critical to avoiding further finance charges. Due to the high interest rates of credit cards, it's preferable to establish a line of credit with your banking institution. We do not, however, recommend taking out a second mortgage, but if there are no other options open to you, this may be your only avenue.

saving for disaster

There is a number of ways to allocate your emergency money, but you must start today. Be sure to consult a financial planner before making any decisions with your funds.

Emergencies are never fun as they usually involve a very stressful, difficult or painful situation. Setting up a solid plan will ensure that you can deal with the situation fiscally, as well as mentally and emotionally.