What is an emergency fund?

An emergency fund is specifically designed to provide financial security during unforeseen circumstances, such as medical emergencies, car repairs, or job loss. Its primary purpose is to cover unexpected expenses that might arise, preventing the need to rely on credit cards or loans, which can lead to debt accumulation.

In contrast, saving for planned vacations or luxury purchases involves setting aside money for future discretionary expenses, which are part of budgeting but do not pertain to emergencies. Similarly, using funds for retirement savings focuses on long-term financial planning rather than immediate and unexpected financial needs. An emergency fund is about preparedness for life’s unpredictabilities, making it crucial for maintaining financial stability.