An Emergency Fund is nothing but an account set aside to deal with emergencies, which often come unannounced.
An Emergency Fund also called “Contingency Fund” and “Rainy Day Fund” is an account of money set aside to deal with personal financial emergencies such as unemployment, hospitalization, etc. An Emergency Fund ensures you don’t have to borrow money during times of emergencies. A Contingency Fund ought to contain at least 6 to 12 months of your regular income, as recommended by experts. This will help you deal with emergencies better.
When emergencies come up, people have no alternative other than borrowing money. Some borrow from their own savings and investments. Some borrow from family and friends. Some borrow from other relatives while some others borrow from outside sources such as banks, financial institutions and private moneylenders.
Emergencies could be anything from sudden loss of employment and hospitalization due to sickness and accidents.
Why borrow when you can have a set of funds dedicated to the sole purpose of handling emergencies? You don’t have to go into debt to deal with emergencies, just take out money from your emergency fund and solve the problem.
Having adequate number of funds in your emergency fund will help you deal with personal emergencies better, rather than depleting your savings and inv3estments and getting into debt.