What is the purpose of an emergency fund?

The purpose of an emergency fund is to provide a financial safety net for unexpected expenses. This type of fund is specifically designed to cover unforeseen costs, such as medical emergencies, car repairs, job loss, or any other urgent financial needs that may arise. Having an emergency fund allows individuals to manage these situations without resorting to high-interest debt, such as credit cards or loans.

This financial cushion promotes stability and peace of mind, as it ensures that individuals can handle life's surprises without derailing their overall financial planning. The other options, while related to financial management, do not align with the primary function of an emergency fund. Paying off debts quickly or funding major purchases are different financial goals that usually require separate budgeting strategies, while generating investment income pertains to growing wealth rather than providing immediate access to liquid funds for emergencies.