Which Choice Or Choices Best Describes The Purpose Of An Emergency Fund?

An emergency fund serves multiple purposes. There are various reasons as to why one would build an emergency fund. While some people may build an emergency fund to protect themselves, others do the same for the protection of people that are close to them. Read The Article To Know which choice or choices best describes the purpose of an emergency fund?

In short, the key purpose of an emergency fund is to keep individuals ready for an unpredictable situation where they have enough funds saved to back them up financially.

An emergency can be of any type. It can be small or big, monetary or non monetary – it is always better to be safe than sorry.

Now coming to your question.

“Which choice or choices best describes the purpose of an emergency fund?”

Well, this may as well be a complicated question for some, and it should be. Emergency funds are complicated to understand.

So, without any further delay, let me help you analyze the options while also taking you through the correct answer to your question.

“Which choice or choices best describes the purpose of an emergency fund?

A) An emergency fund prepares you for unexpected

expenses.

B) An emergency fund keeps you from borrowing

money from friends and family.

C) An emergency fund removes the worry about

expenses not in the budget.

D) All of the above are good reasons to have an

emergency fund.”

The correct answer here is option (D): “All of the above are good reasons to have an emergency fund.”

Now that you have gotten the correct answer let us explore more on why all the options above are correct in their own ways.

Emergency Fund Definition

An emergency fund is a fund reserve that specifically serves the purpose of an unpredictable expense or any financial emergency.

For instance, if something were to happen to your car that needs immediate repair, emergency funds may be of great help financially.

In general, an emergency fund can be beneficial for small or large unplanned payments or bills that may not be a part of your regular spending or expenses.

Why Do You Need An Emergency Fund?

Life is unpredictable. You never know what the future awaits. So, it is always better to be well prepared in case such a situation arises.

Without adequate savings, even the smallest of financial shocks can result in your financial setback. And by any chance, if it turns into a debt, that will stain your financial health in the longer run.

Research has proved that people that struggle to come out from a financial setback have considerably fewer savings that would help them stay protected from any future emergencies. They mostly depend on loans or credit cards, which in turn attract unnecessary debts which might be tough to pay off.

Some people tend to take out money from their other long-term savings, like retirement funds, to cover these said costs.

An Emergency Fund Keeps You Prepared For Unexpected Expenses

The entire concept of an emergency fund is to provide financial backup in times of emergency.

“The purpose of an emergency fund can be described as “preparing you for unexpected expenses.” An emergency fund is a savings account set aside specifically for unexpected or unplanned expenses, such as a medical emergency, job loss, car repair, or other unexpected financial hardship.”

For instance, let us say that you are getting married. A beautiful destination wedding in the countryside, with close friends and family. Everything is planned and all set, but at the last moment, you realize that you have forgotten to book the ticket for your cousin. The wedding funds are already over, and there is barely any money left to buy a new ticket.

Emergency funds come in handy and are of great help in situations like these where you are in immediate need of money for a scenario that you didn’t initially plan for.

An Emergency Fund Prevents You From Borrowing Money From Friends And Family

While there is no shame in borrowing money from a close friend or family in times of need, a lot many people refrain from troubling others for their own emergencies.

Also, if you don’t want anyone to know about it either, it is better to keep an emergency fund that will provide you with the necessary funds that you need.

Borrowing will also land you in unnecessary debt that you need to pay off as soon as possible. So, it is better to avoid debts, no matter how close the friend is to you.

An Emergency Fund Removes The Worry About All Expenses Not In The Budget

If you know that you have emergency funds that will back you up in times of need, it will keep you out of the worry that your expenses might cross your budget.

This doesn’t mean that you will deliberately cross the budget even when it is not needed.

The emergency fund is to cover those expenses that arise unexpectedly, not deliberately.

The emergency funds allow you to stay free of any unnecessary worries only if you use them practically and responsibly.

If you keep spending the money that you have saved in the emergency funds, soon you will be left with no money at all for emergencies that are genuine and require a financial backup.

Best Ways To Keep An Emergency Fund

The best place to keep an emergency fund solely depends on what situation you are in. You will have to make sure that you put the fund in someplace safe, easily accessible, and at the same time where you can’t easily get it in case you are tempted to spend it.

Some of the options where you can safely keep your emergency funds are:

Bank Account:

The bank can be considered one of the safest places where you can store your emergency funds. You may also have a dedicated account where you can save and maintain the money.

Prepaid Cards:

A prepaid card is a type of card that is not related to a bank or any financial institution. You may only spend the amount that is available on the card.

Cash:

You may also keep cash in hand for emergencies. You can either be the cash holder or someone trusted, like a friend or a family member, who can do the job for you. However, you must never forget that cash might get lost, stolen, or even destroyed.

Read More: How To Save Money On Groceries?

Frequently Asked Questions [FAQs]

Q1. What Is The Example Of An Emergency Fund?

Ans. Here, we have an example that shows how you may gather an emergency fund. Let us assume that a married couple has per month expenses, which total $5,000. This would include all of the mortgage, vehicle payments, food bills, and all other necessary outlays. By using the three-month rule, the couple would have to set aside a minimum of $15,000, or at least $30,000 for three months and $40,000 for eight months. They would be saving this money to address all the financial burdens that may arrive out of nowhere.

Q2. How Much Should I Have In An Emergency Fund?

Ans. The amount that you need to save in an emergency fund is subjective. That means it varies from one person to another. The entire plan of savings would depend on how much you prioritize the concept of saving for an emergency and how much you are earning every month.
However, it is always preferable if you keep a substantial amount in your emergency fund. As per the rule of thumb, it is best if you are keeping at least three to six months of your living expenses.

Q3. How Can I Have An Emergency Fund If I Am Living From One Paycheck To The Other?

Ans. This is one of the most challenging things that you may have to do. However, it is better if you eventually stop worrying about the amount that you are saving. Rather, decide on a percentage that you may live without taking it back home. This amount may be 2% or 3%.
It is not necessary that you would have to save substantial amounts every time. Just make sure that you are saving a set amount, which remains the same on every payday.

Q4. What Is An Emergency Fund For?

Ans. As simple as you may think it to be, it is very important that you realize what an emergency fund is and what is not. Not everything that you save goes to an emergency fund. This fund is particularly there for all those bills that come up unexpectedly. This fund would not have any contribution towards your dining or shopping bills. You need to be extremely disciplined and careful that you are not spending the money that is there in the emergency fund unnecessarily. If you are not careful enough, you will have no money saved whenever such a situation arrives. Also, make sure you have the money saved in such a source that you may access it anytime you want. There should not be any fees or extra charges for taking the money out abruptly.

The Bottom Line

In this article, I have justified why option D is the correct answer to the question,

“Which choice or choices best describe the purpose of an emergency fund?”

I have also shed light on what is an emergency fund, why you need it, and which are the best places to save an emergency fund.

Hopefully, this has answered your question and, at the same time, given you the necessary insights about an emergency fund. If there is anything else that you need to add to it, please drop a comment below!

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upasana sarbajna

Upasana is a budding journalist who has a keen interest in writing. She considers writing as therapeutic and is most confident when she writes. She is passionate about music, movies and fashion. She writes in a way that connects with the audience in a personal level. She is optimistic, fun loving and opinionated.

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