What is the purpose of an emergency fund?

The purpose of an emergency fund is to cover unexpected financial emergencies. An emergency fund serves as a financial safety net that allows individuals to manage unforeseen expenses, such as medical bills, car repairs, or sudden job loss, without resorting to high-interest debt or affecting their everyday budgeting. It is generally recommended to have three to six months' worth of living expenses saved in this fund to ensure adequate coverage during times of financial distress.

While saving for major purchases, investing in the stock market, and paying down existing loans are all important aspects of personal finance, they do not align with the primary function of an emergency fund. The emergency fund specifically targets the uncertainty of life events that can lead to financial strain, highlighting its critical role in promoting financial stability and peace of mind.