Do you know what you would do if your car suddenly broke down? What about if you or a family member needed immediate surgery?
Having an emergency fund set up in advance can help you get through just such stressful money-crunch times. An emergency fund is one where enough money is kept to cover about six months of expenses. It would be ideal if the money is saved in an account where it could earn some interest. Emergency funds should be in savings accounts, short term certificates of deposit, or money market accounts where it is easily converted to cash.
Celebrations such as Christmas and birthdays does not constitute an emergency. Both come around the same time each year and as such can be planned for and saved for in advance. With an emergency fund you can avoid taking out a loan or paying credit card debt for the emergency expense. Essentially you are borrowing from yourself and will not need to pay back a creditor any interest for a loan. It is not a good idea to have the emergency fund be accessible by ATM or to have it serve as the overdraft on a checking account because the emergency funds will disappear too rapidly if they are that easy to use.
You can learn more about emergency funds by visiting http://child.unl.edu/planning and clicking on Before You Invest.