What is the function of an emergency fund?

The function of an emergency fund is primarily to cover unexpected expenses. This type of fund is specifically set aside to help individuals manage financial surprises, such as medical emergencies, car repairs, or sudden job loss, without having to rely on credit cards or loans. By having this financial cushion, one can navigate unexpected challenges more comfortably and maintain financial stability.

While retirement accounts and funds for major investments serve significant purposes, they are not designed for immediate, unplanned needs that arise in day-to-day life. Similarly, while it is important to save for anticipated expenses, these expenses are usually planned and can be budgeted for in advance, unlike emergencies which are unpredictable. Hence, the emergency fund's primary role is to ensure that individuals are prepared for financial shocks and can address those needs promptly without derailing their overall financial health.