Emergency funds are a crucial component of financial planning, providing a safety net for unexpected expenses and financial hardships. By setting aside a dedicated fund for emergencies, individuals can avoid falling into debt or having to liquidate long-term investments when unforeseen circumstances arise.

One example of the importance of emergency funds is the sudden need for major car repairs. Without an emergency fund, individuals may have to rely on high-interest loans or credit cards to cover the expenses, leading to long-term financial strain. However, with an emergency fund in place, they can address the issue without incurring additional debt.

Another example is the loss of a job. In such a situation, having an emergency fund can provide a buffer while searching for new employment, covering essential expenses such as rent, groceries, and utility bills without causing financial distress.

References:

• "The Importance of Emergency Savings" - Investopedia
• "Why You Need an Emergency Fund" - The Balance