Chapter P7, Problem 4RQ

To determine

The purpose of an emergency fund, and how much is needed to be in it.

Explanation of Solution

The major purpose of an emergency fund is to facilitate any urgent or unplanned situation where an emergency financial expense or help is required such as needing funds to repair the car, pay medical bills, or lose any income. The second benefit of an emergency fund or cash reserve is that a person does not need to take a loan or credit if he/she has an emergency fund, which saves costs such as timely payment of health insurance will help the person by removing the burden of the huge medical expense.

The size of an emergency fund cannot be the same for every person because it depends on people’s living standards, daily expenses, and income. But every person should reserve at least three to six months’ expenses for an emergency according to their income. This will prevent people to get into uncertain worst scenarios.

Economics Concept Introduction

Introduction: Any uncertain situation can lead to the requirement of an emergency fund such as medical care or to deal with any pandemic situation. Therefore, a person needs to save something for the future to use it as an emergency fund.