An emergency fund is a certain amount of money you tuck away only to be used in case of a crisis. The idea is to refrain from digging into your emergency fund for whims and luxuries, say to buy a new car or a video game console for your kids. It is to be used only in the case of a real financial emergency.

At this point, setting hard earned money aside for a rainy day might not sound fun, but it is very necessary.  From medical expenses to losing a job, any number of unforeseeable scenarios can wreak havoc on your budget. Without emergency savings it can be hard to cope with unexpected events, at least without accumulating debt in the process. This is why everyone, even college students and retirees, should have emergency savings.

There is no ideal, universal amount that should be in your emergency fund. Expert opinions vary from three month’s worth of your total family expenses to all your expenses for a year. The right amount is probably something in between but only you can decide the exact figure you need.

You have to take a thorough assessment of your possible needs and then balance this with your earnings to decide how much you should - and can afford to - set aside. Unfortunately, estimating your possible needs is difficult because an emergency fund is for unexpected circumstances, but by keeping in mind obvious things, such as a single person will need less than a married couple with three kids, you can try to formulate a rough figure. Decide how much will ensure your peace of mind while not so much that you must cannibalize other savings, such as retirement plans, to accumulate it.

It is advisable to keep emergency savings in a place that is not too easy to get to, like a high interest savings account. This is especially true for those of us who are easily tempted to dip into the account for non-emergency expenses, like that plasma screen TV. If the account is difficult to access you will think twice before making a withdrawal. Remember that an emergency here means something that practically threatens your financial survival. The reason why many people end up unnecessarily spending their emergency funds is that they think unfulfilled desires are emergencies!

An emergency savings has to be somewhat difficult to access but still liquid and secure; meaning stocks aren’t a good choice because there is a risk of losing your emergency savings with a poor investment. At the same time, setting aside money for emergencies without earning interest on it would actually cost you money because of inflation, so burying it in the backyard is not recommended.

Here are some of the better ways to keep your emergency savings:

1. Bonds:  buying a bond means that you are lending a particular amount of money to the entity that has issued the bond. In return for this money you get a rate of interest at regular intervals or at the time when the bond matures as well as the return of your initial investment. With emergency savings the security of your investment is a priority, so only invest in government bonds or highly rated corporate bonds. Also, invest only in short-term bonds because you never know when you might need to access your emergency fund.
2. Certificate of Deposit (CD): a type of deposit account which offers a higher rate of interest than a traditional savings account. The idea is that you invest a fixed amount of money for a fixed duration of time to earn a fixed rate of interest. An added advantage of investing in a CD is that it is covered by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. On the downside, a CD can offer a higher interest rate than a traditional savings account because there is a penalty if you withdraw your money before the CD expires – which may be very necessary in an emergency. For this reason, it you choose a CD, try to look for a “no penalty” CD. A no penalty CD can be cashed, without penalty, prior to the maturity date as long as it has been kept for a fixed period of time. This minimum time varies from one institution to another but sometimes can be as little as a week.
3. Money market account: a savings account that offers high interest because it requires a minimum balance, often limits the number of withdrawals and check writing, and imposes a monthly service fee for low balances. It carries FDIC insurance like a traditional savings account and a CD.
4. Money market fund: a kind of mutual fund that invests only in high quality debt. These funds combine interest rates that are comparable to CDs with the ability to withdraw your money at any time without penalty. The catch is that the FDIC does not insure money market funds; however, this kind of investment is normally incredibly safe.