Now that you have made a budget and you *ARE* sticking to it, you can create an Emergency Fund. This is an important step that a lot of people to decide to skip not realizing/acknowledging how important it is. I know that I did. I had been doing good with my budget and paying off my debt. I just closed out a credit card with a very high, and by high I mean 31.5%, interest rate. Then, my A/C blower motor went out. This may not be a big deal for some, but when you live in Central Texas, and its late July, its a big deal. Since I had not set aside some money for an Emergency Fund, like my dad and the Financial Adviser had told me to do (i just don't learn), I had to do something that I hate doing: ask my parents to borrow the money. It was not a lot of money, about $320, but it is the principle of the matter. Also, if my parents would not have been able to loan me the money, then I would have had to go further in debt to get it fixed. If I had made an Emergency Fund, I would not have had to do that. Lesson learned.

There are many different beliefs on how much money you should keep in your Emergency Fund, and where you should keep it. Some say you should keep enough money to cover 1 months worth of bills, and others say as much as 3 or 4 months worth of bills. Some say that you should keep the money in your savings account that you have easy access to, after all, if you have an emergency then you will need the money right away. Still others say that you should keep it in a savings account that is harder for you to get it out, that way you will be less likely to pull it out and spend it on non emergency stuff.

I am kinda in between on all of this. My opinion is that you should keep one months worth of money in a savings account that you have easy access to, and one months worth of money in a harder to reach account. I have one months in my regular savings, and the other months I have in my ING direct account. The ING direct account is an online savings account. It has a little higher interest rate than most savings accounts, and it is not so easy to take money out of it. You really need to decide what is good for you. If you know that you really can't trust yourself to not spend the money, then I would recommend a harder to reach account (don't worry if you fall into this category, that is where I am). If you can trust yourself, then by all means, put it in your regular savings.

To see my advice on budgeting, go to the link at the bottom and click on Budget.