An emergency fund, also known as contingency fund, is a
personal budget
A personal budget (for the budget of one person) or household budget (for the budget of one or more person living in the same dwelling) is a plan for the coordination of the resources (income) and expenses of an individual or a household.
Purpo ...
set aside as a financial safety net for future mishaps or unexpected expenses. A critical part of
financial planning
In general usage, a financial plan is a comprehensive evaluation of an individual's current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. This often includes a bu ...
, it is supposed to ensure one's
personal finances are prepared for any
emergency
An emergency is an urgent, unexpected, and usually dangerous situation that poses an immediate risk to health, life, property, or environment and requires immediate action. Most emergencies require urgent intervention to prevent a worsening ...
so that the risks of becoming dependent on
credit
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
, falling into
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
, or running out of money in general are reduced if such a situation were to occur.
Emergency funds may be used in the case of
job loss, medical emergencies, automobile problems,
home appliance
A home appliance, also referred to as a domestic appliance, an electric appliance or a household appliance, is a machine which assists in household functions such as cooking, cleaning and food preservation.
Appliances are divided into three ...
repairs/replacements and unplanned travel expenses.
Saving
The recommended amount of money to be allocated into an emergency fund depends on one's personal financial or economic situation. Generally, an adequate fund tends to cover six months' worth of expenses or more. In early adulthood, it is generally accepted one should save $500.
An emergency fund includes all the basic expenses like house rent, grocery expenses, electricity bills, phone bills, etc. It is recommended to start with creating an emergency fund while planning your finances.
See also
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Rainy day fund
A rainy day or rainy day fund is a reserved amount of money to be used in times when regular income is disrupted or decreased in order for typical operations to continue. In the United States, the term is usually used to apply to the funds mainta ...
References
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Personal finance