An emergency fund is simply money set aside - saved - for emergencies. Things like your car breaking down or losing one's job. These are emergencies need money without delay to fix something in your life or sustain life you're living until more employment can be found. Emergency funds are important to money smart people. We know that with an extensive emergency fund, we do not have to worry if the car breaks down or if our company goes under. We have a safety net that will keep us going until the matter is fixed.

An emergency fund will build your confidence and keep your stress levels lower. It will keep you from living paycheck to paycheck or always worried about the state of your home appliances when you aren't able to do anything about them if they break. While some believe that getting a credit card for emergencies is the answer, as going into debt because of an emergency is understandable, it is advisable to have an emergency fund that will keep you from using your credit and tapping out your resources.

Who Should Have an Emergency Fund?

All money smart people should have an emergency fund. How much is dependant on where you are with your debt load. Those with less debt load or no debt load can have a large emergency fund and keep growing it. A 6 to 8 month's worth of expenses is what Suse Orman recommended in her book The Laws of Money, The Lessons of Life. Most other experts agree on 3 to 6 month's worth of expense money.

If you have a lot of debt and are working on bringing it down, you should have the minimal amount in your emergency fund. That is one month's living expenses in case you lose your income. This way you have some breathing space. Any more would be throwing money out of the door with little benefit.

How Can I Make My Emergency Fund Work?

There are two pitfalls that ruin an emergency fund: not adding money into it regularly or taking money out for non-emergency purposes. Money smart people use their self discipline and do not fall into either of these pitfalls.

How Do You Build an Emergency Fund?

The first step is to put your emergency fund into your monthly budget as a bill, due every month. As you pay this bill to yourself each month you will be developing the habit of saving for your emergency fund. How much this monthly bill is should be doable, so that you will continue to do it. If it's only $50 to $100 a month, so be it. It's a start and with every month you have another bit to help you get by should you have an emergency. Once you have saved the amount you want into your emergency fund, keep up the monthly savings bill for retirement or other worthwhile saving fund - stay in the good savings habit. This way if you ever have to dip into the emergency fund, you can go right back to saving in it without too much of a fuss.

Want to super charge your emergency fund savings? Here are a few more ways to put extra money into your emergency fund:

• Work some overtime or do some side work;
• Sell stuff, have a yard sale or use Ebay;
• Using coupons? Place the savings into your emergency fund.
• Any other extra money coming in - gift money, raises, etc.

Where Should You Keep Your Emergency Fund?

Keep your emergency fund somewhere it is not easily touched but it can be made liquid(turned into cash) quickly, say within a couple of days. Search around for a second savings account that is not attached to your checking for over-draft protection or anything else. Be sure the account has no fees and that it pays a decent interest rate. This account should be stipulated for emergencies only and should not be used for vacation, Christmas or other funds. The less you do anything with the account - expect put money into it - the less likely you are to use it for things other than emergencies.

Online saving accounts do nicely for second savings accounts that hold emergency funds. You don't pass by regularly and it's harder to touch but you can get to the money if you need it.

Okay, really, how important is an emergency fund?

Let's look at the stats. According to a survey done by Experian in June 2005: 'a large number of Americans find themselves financially unprepared in the case of extended job loss or disability: 2-in-5 (41%) of those polled said they do not have an emergency fund of any type. Of those who do have an emergency fund, 31% would be completely "tapped out" within three months of a financial crisis.'

So, 2-in-5 people would turn to credit cards or some other debt making alternative to take care of an emergency such as a car breaking down. Or should those 2 people lose their income, they would need to depend on others good graces to feed their family and/or have to take the first available job offer to them.

To answer the question which titles this section, it is very important to have an emergency fund and you need to get started today.

Things You Should Use Your Emergency Fund For

• Medical bills that aren't covered by insurance.
• Travel for family emergencies.
• Repair for cars, important parts of your house or appliances.
• Bills if you lose your income.

Ten Things You Should Not Use Your Emergency Fund For

1. Anything from a clothing or shoe sale.
2. A get-away trip.
3. The latest gadget.
4. Gifts for Christmas or Birthdays.
5. Anything that has to do with keeping up with the Jones.
6. An expensive dinner date.
7. Impulse shopping.
8. Any home improvements that are not necessary to living in the home. For instance, you need heat but you do not need your driveway blacktopped.
9. A new television or payment for an upgrade to cable tv.
10. Anything your kids are asking for, whether it is a new pet, a new game or money to hang out.