What is the purpose of an emergency fund?

The purpose of an emergency fund is to provide financial security in case of unexpected expenses. This fund serves as a safety net that helps individuals withstand financial shocks such as medical emergencies, car repairs, job loss, or other unforeseen circumstances. By having readily accessible cash set aside, individuals can avoid going into debt or resorting to high-interest borrowing when an unexpected cost arises. This financial cushion enhances peace of mind and allows for better financial planning.

While options like accumulating wealth for retirement, investing in stocks and bonds, or paying off existing debts are important financial strategies, they do not align with the primary function of an emergency fund, which is to ensure immediate liquidity for surprising and often unavoidable expenses. Having an emergency fund is foundational to financial health, as it enables individuals to handle crises without derailing their entire financial situation.