Emergency Funds 101

Where to park your rainy-day cash.

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Careful as you may be with your money, unexpected expenses are bound to come along. Money Blue Book recounts a few: a last-minute overseas trip to visit an ailing relative, a tax liability bill of nearly $10,000, and a car breakdown that cost more than $1,400.

If you're not at least somewhat prepared (who is prepared to spontaneously pony up $10,000?), unexpected bills can really sting. That's where your emergency fund comes in. Financial planners will advise you to lock up three to six months' of living expenses and access it only for true emergencies. But it's interesting to learn how this sometimes works out in real life. For example, Money Blue Book's Raymond takes a less stringent approach by using his emergency fund "as a monetary buffer for various out-of-the-norm, over-the-limit type expenses that include necessary car repair charges and unplanned vacation trips." Although he says savings and money-market accounts are ideal, he has also relied on a brokerage account as an emergency fund (not advisable) and a credit card with a zero percent balance-transfer offer (yikes!), which he used to pay off the $10,000 tax bill.

In a 60-second guide to short-term savings, Motley Fool offers a rundown of more traditional places to park your money, such as high-yield savings accounts, money-market accounts, and money-market mutual funds. The Fool covers the pros and cons of each type of account and suggests that for nonemergency savings, less-liquid investments like certificates of deposit will most likely give you a better interest rate.

How long will it take you to grow a respectable emergency fund? This calculator will estimate how much you'll need to set aside each month to reach a particular savings goal.

Also, check out these tips from Morningstar on where to turn for cash when you're in a financial pinch.