Best Places to Keep an Emergency Fund

Introduction

It is quite rare when an emergency comes with a warning. Whether it is a medical bill, sudden job loss, or urgent home repair, an emergency situation can force you to make quick financial decisions, that too under pressure. In moments like these, having quick access to cash counts the most and not chasing high returns. That’s where an emergency fund plays a critical role.

Choosing where to park this money is equally important as building the fund itself. The best places to keep an emergency fund are the ones that balance safety, liquidity, and modest growth. After reading this blog post till the end, you’ll learn where to store your emergency savings, which options to avoid, and how to pick the right solution for your financial life.

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What Is an Emergency Fund and Why It Matters

An emergency fund is simply the money you set aside specifically to cover unexpected expenses that come suddenly. As discussed earlier, it could be a medical bill, losing your job, a major car repair or any urgent expense that is least expected. For your information, you are not supposed to use the emergency fund for planned purchases, vacations, or investments. Its only purpose is to protect you when life throws a financial curveball. Having said that, are you aware that at least 75% of Indians do not have an emergency fund. Shocked?

The real value of an emergency fund lies in what it prevents. Imagine a situation in which you do not have an emergency fund. Left with no other option, finally you will be forced to use credit cards, personal loans, or premature withdrawals from long-term investments. However, the problem with such options is that they usually come with high interest costs, penalties, or lost future growth.

An emergency fund that is well-parked gives you breathing room. It gives you ample time to make thoughtful decisions instead of hasty ones. In short, that peace of mind is the true return on this money.

Top Criteria for an Emergency Fund

Before going deeper into specific accounts, you should understand the criteria that matter most. Unlike long-term investments, emergency funds follow different rules.

Liquidity is the topmost priority. You should be able to access the money quickly, ideally within a day or two, without penalties.

Safety comes next. Your emergency savings should not fluctuate in value. Market volatility defeats the purpose of having stable backup cash.

Modest returns are a bonus, not the goal. It is true that your money should earn some interest to keep up with inflation.

However, returns should never be at the cost of access or security. Keep these points in mind so that it becomes easier to evaluate the best places to keep an emergency fund.

Split Your Emergency Fund Into Two Parts

Before going further into the best places to keep an emergency fund, let’s see how to split your emergency fund into two parts.

1. Immediate Access

The first part is the money you need for immediate access. Some examples are hospital bills or travel tickets for which you need instant cash. Set aside 30-40% of your emergency fund for this purpose. This portion of your emergency fund can be parked in a savings account or sweep-in FD.

2. Short-Term Buffer

The remaining part of your emergency fund i.e. 60-70% can be parked in debt options that carry low risk. It could be liquid or overnight mutual funds. The reason behind choosing these options is that they offer better returns without compromising on safety.

4 Best Places to Keep an Emergency Fund

Curious to know the details of the 4 best places to keep an emergency fund? Here you go.

1. Savings Account

The first investment option is a bank savings account. The best part of a savings account is that you can access your emergency fund instantly. Moreover, there is no risk with this option. Also, here you will get approximately 2.5%-4% returns. Park 1-2 months’ expenses, i.e. the money you need for immediate liquidity in a savings account.

2. Sweep-in FD

A sweep-in FD links your savings or current account with a Fixed Deposit Account. It works in such a way that an amount exceeding a predetermined limit will be automatically transferred to be invested in a fixed deposit. The reason why a sweep-in FD qualifies as one of the best places to keep an emergency fund is because it offers a relatively higher interest rate when compared to a regular savings account. Moreover, the amount can be accessed within 1 day, the risk level is very low and it offers returns in the range of 5%-6.5%.

3. Liquid Mutual Funds

A liquid mutual fund is a type of debt mutual fund that invests money into debt and money market securities with maturity of up to 91 days only. Consider investing a bulk of your emergency fund in liquid mutual funds as they offer returns between 4%-7%. Here you can withdraw your fund the next business day and the risk level is also low.

4. Overnight Funds

Overnight funds are debt funds that invest in assets or securities with a maturity of just 1 day. If you are an ultraconservative investor, go for overnight funds as the risk level is near to zero. These funds let you withdraw your amount the next business day and offer returns in the range of 3%-5%.

Key takeaways

• An emergency fund is the amount you set aside only for meeting unexpected expenses that come suddenly such as medical bills, job loss etc.
• The major criteria for an emergency fund are liquidity, safety and modest returns.
• Split your emergency fund into 2 parts. The first one is for immediate access (30-40%) and the second one is a short-term buffer (60-70%)
• 4 best places to keep an emergency fund are savings Account, sweep-in FD, liquid mutual funds and overnight funds

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Parting Words

All set to park your emergency fund? If you are confused whether to invest that amount in a liquid mutual fund or overnight fund, all that you need is expert guidance.

Entri Finacademy, a trusted finance education platform since 2022 is conducting mutual fund courses. The team of highly experienced mentors will help you learn mutual funds right from the very basics to the advanced levels. Apart from mutual fund courses, Entri Finacademy is also conducting stock market and forex trading courses. With features such as exclusive doubt clearance sessions, practical trading support and both live and recorded classes, learning is a breeze at this institution. Last but not least, at Entri Finacademy, there is also the option to learn stock markets in several regional languages including Malayalam and Tamil. With over 9 million students, there is no better option to learn stock markets and mutual funds. To know more about Entri’s mutual fund and stock market courses, click here.