Where to Keep Your Emergency Fund?

I learnt a long time ago that an emergency fund can protect you when life doesn't go according to plan. It took me much longer to understand that keeping the entire emergency fund in a savings account for many years may not be the smartest way to manage it.

The reason is inflation. Money sitting in a savings account may still be there when you need it, but its purchasing power can gradually fall as the cost of things around you increases.

I started thinking about my emergency fund differently. I need the money to be safe and accessible, but I also don't want it to quietly lose purchasing power while sitting untouched for years.

An Emergency Fund Has Two Jobs

The first job of an emergency fund is liquidity. If something unexpected happens, you should be able to access the money without having to sell a long-term investment at an inconvenient time.

That is why I don't believe an emergency fund should be invested in stocks or equity mutual funds simply because they may offer higher returns. An emergency is the wrong time to discover that the market has fallen and the money you need today is temporarily worth less than you expected.

But there is another side to it. An emergency fund may remain untouched for years, and during that time inflation continues to work in the background.

So I think we need to find a balance between accessibility and protecting the value of the money.

Where Should You Keep Your Emergency Fund?

Personally, I keep around 30% of my emergency fund in a savings account. This is the portion I want immediately available because there may be situations where I need money today and don't want to wait for a mutual fund redemption.

I keep the remaining 70% in a liquid mutual fund. Liquid funds invest in short-term debt and money-market instruments and can be considered for the portion of an emergency fund that you don't expect to need immediately.

But remember, a liquid mutual fund is still a mutual fund and not a bank savings account. Its value isn't guaranteed, and redemption is subject to the fund's applicable process, cut-off timings and settlement arrangements.

Why I Prefer This Combination

The 30% in my savings account gives me immediate liquidity. If something urgent happens, I have money available without having to think about where to get it.

The remaining 70% is not simply sitting in my bank account. It has the opportunity to earn a return while remaining relatively accessible, and I like seeing the money grow rather than leaving the entire amount exposed to the gradual erosion of purchasing power caused by inflation.

I don't expect my emergency fund to make me rich. That's not its purpose.

I simply want the money to remain useful if I need it several years from now. If the return from a liquid fund helps offset some of the effect of inflation over time, that's an added benefit.

How Quickly Can You Get Money From a Liquid Fund?

This is something you should understand before deciding where to keep your emergency money. For a standard redemption from a liquid mutual fund, the redemption proceeds are generally paid on the next business day, subject to the applicable process and cut-off timings.

The redemption cut-off is currently 3:00 PM on a business day. So, if you submit a valid redemption request before the applicable cut-off, you should generally expect the money to be credited on the next business day rather than immediately.

This is why I don't keep 100% of my emergency fund in a liquid mutual fund. The 30% I keep in my savings account is my first layer of emergency money, while the liquid fund forms the second layer.

What If You Need Money Immediately?

There may be situations where you need money immediately but most of your emergency fund is still sitting in a liquid mutual fund. In such a situation, one possible short-term bridge could be a credit card, provided you already have the money coming from the mutual fund and can repay the credit card bill in full as soon as the funds reach your bank account.

But I want to be very clear about this. A credit card is a dangerous financial instrument if you are not disciplined enough to repay it in full and on time.

I would never suggest using a credit card as a substitute for an emergency fund. The idea is only to bridge a very short gap when you already have adequate emergency money and are waiting for the redemption proceeds to arrive.

If you know that you may spend the money and carry the credit-card balance forward, don't use this strategy. Credit-card interest can quickly turn a temporary liquidity problem into a much bigger financial problem.

What About Keeping Cash?

I personally don't keep physical cash as part of my emergency fund. Some people prefer keeping a small amount of cash at home for situations where ATMs, banking services or digital payments may not be available.

I can understand the reasoning, but whether you need cash at home and how much you keep is a personal decision. For me, having an immediately accessible portion in my savings account is sufficient.

Don't Chase Returns With Your Emergency Fund

There is another mistake I think we should avoid. Once we learn that our money can earn more somewhere else, it becomes tempting to move the entire emergency fund into investments that promise better returns.

But that defeats the purpose of an emergency fund.

This money has a specific job. It is there to protect you when something goes wrong, not to maximise your investment returns.

I'd rather have an emergency fund that earns a reasonable return and remains accessible than one that earns more but creates problems when I suddenly need the money.

My Approach

Today, my approach is fairly simple. I keep around 30% of my emergency fund in a savings account for immediate access and around 70% in a liquid mutual fund because I don't expect to need the entire amount immediately.

This is my personal approach, not a rule that everyone should follow. Someone with unstable income, large family responsibilities or a different financial situation may reasonably want a larger portion immediately accessible.

The important thing is to understand what your emergency fund is supposed to do. It should be accessible when you need it, reasonably protected from unnecessary risk and managed sensibly enough that inflation doesn't completely undermine its value over the years.

I learnt the importance of having an emergency fund the hard way. Now I'm learning the next lesson: having an emergency fund is only the first step; where you keep it matters too.

For me, there is a certain satisfaction in knowing that the money is available when I need it while also knowing that I'm not simply leaving the entire amount sitting idle year after year.

That, to me, is a sensible way of looking at an emergency fund.