What is an emergency fund?

An emergency fund is specifically designed to cover unexpected expenses that may arise, such as medical emergencies, car repairs, or sudden job loss. This fund provides financial security and peace of mind, ensuring that you have readily accessible cash to handle unforeseen circumstances without resorting to high-interest credit cards or loans.

Having a dedicated amount of savings for emergencies helps individuals avoid financial stress and maintain stability in their lives. The key characteristic of an emergency fund is its purpose: to be a safety net during unpredictable times.

The other options do not align with the primary function of an emergency fund. Savings for luxury purchases, while useful, are not meant for unexpected expenses. Similarly, savings exclusively for travel expenses or investments in stocks do not serve the purpose of addressing financial emergencies, as they are designated for specific purposes that don't provide immediate liquidity in urgent situations.