An emergency fund is an amount of money you set aside for use in case of unexpected expenses like job loss or a big medical bill not covered by insurance. The words “emergency fund” have a bit of a scary connotation to them, but at the end of the day, an emergency fund is more or less a savings account - and savings accounts shouldn’t be scary.
The benefits of an emergency fund
The reason why many people make a distinction between an emergency fund and a savings account is that it’s common practice, especially as a young adult, to keep the majority of your savings as investments. Whether you’re investing in low-risk exchange-traded funds or individual stocks like Apple or McDonald’s, invested savings aren’t as accessible as money that’s just sitting in a savings account. An emergency fund, on the other hand, is typically kept in a savings account so that you can have quick access to cash without having to sell investments.
At the end of the day, a savings account is more or less the same thing as an emergency fund - so if you have a savings account that you add to regularly, good work! The next step should be to figure out exactly how much you want to have in your emergency fund. Once you reach that number, it’s a good idea to try and invest the rest of your savings. After all, having an emergency fund is a good idea, but you won’t generate much in returns, and your money will lose value over time to inflation. An emergency fund should be for, well, emergencies.