Creating an Emergency Fund

4. Understand its purpose: The money should be used for any unexpected expenses that occur. Obviously, it is not meant for a vacation you want to take or some gadget you want. It also shouldn't be used for things such as insurance bills or property taxes, which you should anticipate and account for in other areas of your budget (but which take many people by surprise since they aren't a monthly expense).

The emergency fund is for expenses you don't expect. For example, you can use it if you get into a car accident and need to pay a $1,000 deductible on your insurance or if you break your arm and have more in medical costs than you normally would have.

5. Use it when you need it: Many people get discouraged when they build their emergency fund and then something unexpected happens and they are forced to use part -- or all -- of it. While the best-case scenario is that you never need to use your emergency fund, it's important to remember the reason you built it in the first place.

If a time comes when you must use part or all of your emergency fund, you should actually congratulate yourself on a job well done. Had you not put it in place, you would likely be in debt over the emergency instead of having to build the fund up again.

Taking the initiative to create and save for an emergency fund today will help ensure that your finances are in much better shape in the years to come.

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