What is the primary function of an emergency fund?

The primary function of an emergency fund is to cover unexpected expenses and financial emergencies. An emergency fund is specifically designed to provide a financial safety net, allowing individuals to manage unforeseen circumstances without derailing their overall financial stability. This might include expenses such as medical emergencies, car repairs, or sudden job loss, which could otherwise lead to significant financial strain if not adequately prepared for.

Having this fund in place helps individuals avoid going into debt or using high-interest credit cards when such emergencies arise. It is recommended that individuals save three to six months' worth of living expenses in their emergency fund to ensure they are well-prepared for life's unexpected events. This emphasis on readiness for unplanned situations distinguishes the purpose of an emergency fund from typical expenses like vacations, investments, or paying off loans, which are part of other financial planning strategies.