What is an emergency fund? How big should it be? And what all is required to make it?
We will get to know in this article.
Friends, before you start anything interesting, the most important thing—which I have mentioned many times—is to make an emergency fund. A fund that is used for emergencies. I will share all the details with you in this article because many people have asked: how big should an emergency fund be? How to make it? Where to keep it?
Should we keep it in a Fixed Deposit or let it rot in the bank? What should we do?
So, answers to all those questions will be given in this article.
First of all, what is an emergency fund?
An emergency fund is a fund that is set aside, which means you keep it separately from your usual expenses so that, God forbid, if you have any emergency, then you have a medium where you have excess cash to use and spend.
Now, why should it be kept separately? Because by design, it is used for something that is unpredictable.
For example, insurance.
Insurance is a form of an emergency fund—whether it is health insurance or life insurance or any other form of insurance that you have taken.
So, an event which you cannot predict, like accident, death, injury, or illness—when you take financial protection against these through an insurance product, that is a form of an emergency fund.
But everything cannot be insured.
Let’s assume, God forbid, you lost your job and it took you 3 months, maybe 4 months, to find another job. Now your monthly expenses cannot stop because of that, and that is why you need an emergency fund for something that you cannot plan for but you know may happen, and you keep this money aside for that.
Now, what should be the size of an emergency fund?
My genuine request is that you should keep at least an emergency fund of 6 months, ideally for 12 months. It can be difficult to make it, especially when you are very young and have just started your earning career, but that is precisely the reason why an emergency fund is important.
If something untoward happens to us in the beginning—for which we had never planned, for which we were not prepared—that is when it hits the most.
Instead, today, at the age of 40, if something like that happens, when suddenly an expense occurs, he can still handle it because there are a lot of investments, a lot of liquid assets. Then, by doing something or the other, I can have some cushion.
But if you are 21 or 22 years old like me, maybe your monthly salary is ₹20,000–₹25,000–₹30,000, and suddenly an expense of ₹1 lakh occurs—how will you even arrange for it? There is nothing that you can do.
The only possible way is to take a loan from someone, and that is never reliable, because that loan will have to be paid back at some point, and it might be that you won’t even get it. That is why you do everything possible early on in your career so that you can make an emergency fund.
But how big should it be?
At least 6 months and ideally 12 months.
Now what do 6 months or 12 months mean?
Like, what is 6 months or what is 12 months? For that, we will play with Excel.
To give you a broad definition: whatever your monthly expenses are on your needs, multiply that by 6—that is your 6 months’ emergency fund; or multiply that by 12—that is your 12 months’ emergency fund.
What all does it include?
Things like any ongoing loan EMI, your rent, your utilities like electricity, food, water—all these needs which cannot be ignored. I’m sure you can reduce them.
But all your desires—like eating out, ordering in from Swiggy or Zomato, buying clothes, buying mobile phones—none of those are a part of it.
Because the expectation is that, God forbid, if some emergency occurs, then you can stop doing all these things.
We are not addicted to having Domino’s every day, or buying a new phone or dress or T-shirt every day. Nothing like that. Who buys it every day? But you get the drift.
The idea is that you will zero down your desires. Your needs may remain the same because they are required and have to be met. They may be reduced, but the amount then becomes your monthly expense multiplied by 6—becomes your 6 months’ emergency fund.
Now, how does it work?
Let’s go and figure it out. For this, we are going through an Excel sheet.
Alright, so now we are on the Excel sheet. Yay!!!
It will be good fun!
- Suppose your salary is ₹25,000
- Your rent is ₹8,000
- Your utilities are ₹4,000
- Your loan EMI is ₹2,500
- Your personal expenses: ₹5,000
- And finally, you invest (which you must)—the remaining ₹5,500
Okay, so nothing remains at the end of the month.
Now we have to make a category here.
The first category we will put is needs, because they are important.
These are your wants or desires, and these are your investments.
So, our needs are for ₹14,500.
So 6x emergency fund = ₹87,000
And 12x emergency fund = ₹1,74,000
Basically, if you can save around ₹90,000, that is your emergency fund at a 6x level.
If you can save ₹1,75,000, then that is broadly your 12x or emergency fund for 1 year.
Now, this amount seems really big!
Like, how do I even make this? Because after eliminating everything, I’m left with only ₹5,500, which I invest.
And you want me to stop that also? Even if I do this, how many months will it take?
If you divide it by ₹5,500, it will take 16 months.
So, I will have to stop my investments for 16 months. And after 16 months, I will have a 6-month emergency fund? This is absolutely stupid!
But that is the challenge around building an emergency fund—and that is why people do not make one.
So here are 3 tips from my side to build an emergency fund.
It will take time—that won’t change—but it’s better to make it as early as possible.
Number 1: Pause all your investments until you are able to build your emergency fund.
This is actually the right thing to do. So please don’t get FOMO about investing in crypto, Smallcase, or stocks—all of that can wait.
Because until you do not have an emergency fund, you should not be doing anything with your money—you are still not protected.
(Of course, all of this is assuming that you have already taken health insurance and life insurance.)
Number 2: Until you get an emergency fund, pause your personal expenses as much as you can.
Of course, all of it won’t be possible, but pause as much as you can.
- Do not go out as much as you do
- Do not eat out as much
- Do not order in as much
- Do not buy things that can be postponed
This emergency fund is the basis of your protection. Please do not ignore it.
Number 3: Whenever you get a lump-sum amount—maybe some money from parents, a bonus, or an FD matured—
Add that to your emergency fund. Any lump-sum amount must go towards the emergency fund.
Now, ideally this emergency fund should be in a separate bank account.
Nowadays, it’s very easy to open a bank account.
So what you will do is: whether it’s your salaried account or when you get money from your internship, stipend, freelancing, or salary—that would be your inflow account.
You will open a separate bank account for your emergency fund. This can also be a sub-account (many banks offer this option).
The basic idea is: every month, in a disciplined manner, the ₹5,500 of your investment and whatever you can save from the other ₹5,000—plus whatever lump sum you get—the minute you get it, should be deposited into that account.
You don’t even look at it. It’s almost as if your salary has been reduced by ₹10,500.
So your salary is not ₹25,000—instead, it is ₹14,500 actually.
The remaining ₹10,500 will go directly to your emergency fund.
If this money stays in your bank account, I can give it to you in writing that you will never be able to build an emergency fund. Something or the other will always knock on the door and say:
“Hey Arif, Arif, only ₹50,000! Look at that deal on Amazon—it’s an amazing phone, it folds like this, opens like that, Ranveer is promoting it—let’s buy it!”
So the point is: you have to be disciplined around this.
Thanks for pointing that out! Your article is very long, so I’ve split it into parts. Here’s the continued and corrected version from where it left off (starting from “Now, when you are building your emergency fund or you have created it already…”):
Now, when you are building your emergency fund or you have created it already,
Then where should you keep it?
This is the biggest question I get asked, and here is the answer:
It will have 3 components:
- 10% in cash
- 20% in bank savings account
- 70% in liquid mutual funds
Let’s go through each one of them.
1. Cash
Now you’ll be like—cash?!
Who keeps cash nowadays?!
But if your emergency fund is ₹87,000, then I’m saying that at any point, you must have ₹8,700 or ₹9,000 in cash.
Now, this is not cash that you carry in your wallet.
This is cash that you have kept in your cupboard or pillow or lentil jar—wherever you keep it, or given it to your mother—whatever the case may be.
This is for those times when only cash can help.
Of course, the replacement for that is a debit card—so if you have a debit card and access to an ATM network, then you don’t need to keep this cash physically.
You can withdraw ₹9,000 from your emergency fund bank account at any point.
2. Bank Account
So around ₹17,500 of your emergency fund should be in your savings bank account.
Please do not take an FD for this—for the simple reason (and I’m being serious here, even though I often mock FDs)—they have their own purpose.
When you take an FD, many times when you want to encash it, you have to bear a penalty.
That’s not something you want to do in an emergency.
Remember, this is an emergency—it’s an event you can’t plan for.
So, at that point, there should be an absolutely seamless way for you to access that money you’ve parked aside.
Let it sit in the bank. Let it rot at a savings interest rate—it’s absolutely fine.
Because this emergency fund is ideally not too big—it’s only for 6 to 12 months.
Inflation only eats into it after 5–10 years. So during that time, this fund can serve your purpose even if it earns just 2–3%.
This should be in your savings account. Do not touch it.
3. Liquid Mutual Funds (70%)
The remaining bulk amount—₹60,900 or ₹61,000—should go into liquid mutual funds.
What are liquid mutual funds?
Liquid mutual funds are basically fixed income funds.
Broadly, they are like FDs. But the good thing about these is that they are liquid, which means:
Benefit #1: No Exit Load
When you withdraw money (i.e., sell the fund), there’s no exit load, meaning no penalty or expense to get your money out.
Benefit #2: Money in 24 Hours
You get your money within 24 hours of selling the fund.
Normally, other mutual funds take 2–3 days to credit money after withdrawal.
But liquid funds credit the money within 24 business hours—as long as it’s a working day.
That’s why we keep 10% in cash and 20% in the bank—to cover this 24-hour gap.
The good thing is, liquid funds earn 5–7%, which is slightly better than an FD.
Of course, it’s not amazing, so you can’t invest your life savings here.
But it’s equal to or slightly better than inflation, which is all you need.
Your money doesn’t rot; it stays stable, earns at inflation rate, gets credited fast, and has no exit charges.
Now, what if you need the money immediately, during those 24 hours?
That’s where a credit card helps.
If you don’t have one—you should get one.
Because in that moment, a credit card acts as a temporary backup.
You know you have ₹60,000 in liquid mutual funds—it’s just not in your hands right now.
So, use your credit card for that moment.
Within 24 hours, after you sell your liquid mutual fund, you’ll get the money in your account.
Then, when your credit card bill comes, repay it fully with that money.
And that is the power of having both an emergency fund and a credit card.
Follow the 10:20:70 Rule
- 10% Cash
- 20% Bank Account
- 70% Liquid Mutual Funds
Keep this rule in mind while building your emergency fund.
Which liquid fund should you use?
Just do a simple Google search.
Or visit:
👉 Moneycontrol – Liquid Fund Returns
If you look at the 5-year return—it’s around 6%, which is close to inflation.
Slightly better than FD. That’s exactly what you want.
You don’t need more. The most important thing for your emergency fund is that it should be risk-free.
Final Note
Don’t ever put your emergency fund under any form or level of risk.
- Never use it for stock investing
- Never use it for crypto
- Never use it for gold
- 100% never use it for real estate
Even if real estate is stable or not—it is not liquid.
When you need the money, you won’t be able to arrange for it instantly.
I hope this was useful.
I hope you benefited from it.
And I really hope—wholeheartedly—that despite all your expenses, you’re able to create an emergency fund of at least 6 months, and ideally 12 months for yourself.
If you have any questions, please don’t forget to ask in the comments section.
