How to Build an Emergency Fund: A Complete Guide for Indians 2025

Published on October 10, 2025

10 Min read time

Quick Summary

An emergency fund acts as a vital financial safety net to handle sudden expenses like job loss or medical emergencies.
Use an emergency fund calculator to estimate how much to save and build savings for emergencies with disciplined planning.
Learn what is a financial emergency fund, how to grow it, and where to keep your emergency fund in India for smarter money management in 2025.

An emergency fund acts as a crucial financial cushion, offering peace of mind during life’s unexpected moments be it a sudden job loss, medical crisis, or urgent home repair. In today’s fast-paced world, having a dedicated reserve ensures you’re prepared for uncertainties without falling into debt. This guide provides a clear understanding of why an emergency fund is essential, how much you should ideally save, and smart strategies to build and manage it. From choosing the right place to store your savings to maintaining consistency in contributions, you’ll learn how to secure your financial future with confidence and clarity.

What Is An Emergency Fund?

An emergency fund is a savings reserve designed to cover unexpected financial expenses. Think of it as a financial cushion that protects you when life throws curveballs whether it’s a sudden job loss, medical emergency, or an unexpected home repair.

In India, many people are unaware of the importance of an emergency fund, or they may underestimate how much they need. This article will walk you through the basics of an emergency fund, why you need one, how to build it, and the best places to store it.

Why Do I Need An Emergency Fund?

An emergency fund is one of the most important financial tools you can have to protect yourself from unexpected events. Below are the key reasons why having an emergency fund is essential:

Financial Security: If you face a sudden job loss or medical emergency, an emergency fund can help cover your living expenses until you get back on your feet.
Avoid Debt: Without an emergency fund, you might have to rely on credit cards or loans, which can lead to debt and high interest payments.
Peace of Mind: Knowing you have a financial cushion can reduce stress and help you focus on other important aspects of your life.
Unexpected Costs: From car repairs to home maintenance, unexpected expenses can pop up anytime. An emergency fund ensures you’re prepared for these surprises.
Investment Protection: Having an emergency fund means you won’t have to sell investments at a loss to cover immediate expenses.

How Do I Build It?

Saving is doubtlessly a good habit. It’s important to plan, be consistent, and be disciplined when setting aside money for emergency funds. There is a wide range of strategies to save money for emergencies. One can use one or more strategies, per your financial condition, to build up your fund.

1. Set A Goal

A definite savings goal plan is a time-tested method of saving up money. A plan helps one stay motivated and enthusiastic. While making a plan, one needs to consider their monthly income and expenses to clarify how much one can save. Then, one can fix a reasonable goal using a savings planning tool found in abundance online.
Using such a tool, one will be able to calculate the possible amount one needs to set aside each month to attain your goal. It also helps to identify the number of months it would take you to reach the goal. One needs to start by cutting down on unnecessary expenses. Be sure to allocate any extra money in your budget specifically for emergency funds.

2. Create A System For Making Consistent Contributions Of Emergency Fund

To be able to contribute to the emergency fund consistently, one needs to be a strict disciplinarian. However, if one is not so, then creating an automatic savings plan is the best and easiest method to make your savings consistent.
An automatic savings plan is indeed quite simple. One must schedule a recurring deposit from either a checking account into the linked savings account. The frequency of these deposits depends solely on how often one deposits money into the checking account. It can also vary as per the user’s personal preferences.
Setting up an automatic savings plan removes the burden of manually transferring money. Moreover, when savings are automatic, one is less likely to spend the excess money on unnecessary purchases. In fact, in no time, savings will become a habit, and one can effortlessly grow their emergency fund.

3. Regularly Monitor Your Emergency Fund Progress

Regularly monitoring one’s savings is indispensable to the entire savings process. One needs to devise ways to keep oneself motivated. It can either be in the form of jotting down a running total of one’s contributions towards the savings account or receiving an automatic notification on their account balance.
Regularly monitoring savings helps to have a fair idea of one’s progress. One should also know how much money they still need to save to meet their savings goal. Moreover, one can set small goals and reach them. One must also pat their back for successfully sticking to their savings habit and reaching the savings goal.

Where Should I Keep An Emergency Fund?

Where one is to put their emergency funds solely depends on their situation. Nevertheless, one needs to be mindful of putting their hard-earned savings. Ensure that you keep the emergency fund easily accessible, secure, and in a location where you are not tempted to spend it on non-emergencies.

Three crucial aspects one needs to consider while deploying an emergency fund, are as follows:

1. Security

Since an emergency fund is meant to help one overcome a financially tough situation. One should avoid putting in places where there is a chance of capital erosion in the short term. Hence, one must avoid equity-based mutual funds or any such options with proportionally high risk.

2. Accessibility

Since emergencies demand immediate action, one needs to ensure that emergency funds are conveniently accessible. This accessibility ensures fast responses to unforeseen situations, safeguarding financial stability.

3. Liquidity

Liquidity refers to how fast one’s investments can be converted to cash. Hence, one should avoid long-term deposits, provident funds, bonds, and national savings certificates, which either have an upper withdrawal limit or are redeemable after maturity.

Following are some of the options where one can put their emergency money:

Cash – To keep the emergency fund accessible for use as and when required, one can store it at home. It is advisable to keep 15% of the fund in liquid cash. However, it’s essential to be cautious to prevent the money from getting lost, stolen, or destroyed.
Bank Deposits – One can keep another 15% of the emergency fund in their bank account. It not only imitates the risk of spending money on unnecessary purposes but also keeps it safe. In addition to this, one can also earn a small amount of money as interest on the savings account.
Investment – Investing the remaining 70% of the emergency fund can be done in either liquid mutual funds or short-term deposits. Each of these debt instruments is highly liquid and has minimal risk, and one can liquidate these investments through a bank’s app or a broker. After liquidation, their bank account will receive the funds within one or two days.

30% of the emergency funds should be kept separately at home or in the banks so that they can be easily accessed and used for more minor emergencies.

In a financial emergency, liquid mutual funds have a slight advantage over bank deposits. For a liquid fund, the entry barrier is low. Unlike a fixed deposit, one can save a minimum amount to invest in a liquid mutual fund. In addition, liquid mutual funds usually offer higher returns than standard bank deposits. Lastly, the concerned bank might levy a premature withdrawal penalty on the fixed deposit if withdrawn prematurely. However, this is not the case with liquid funds, making them a more flexible option during financial emergencies.

When Should I Use the Emergency Fund?

It proves most valuable when you can differentiate between genuine emergencies and less immediate expenses. True emergencies, such as unforeseen medical bills or a sudden job loss, require accessing emergency funds, whereas it is not an emergency if you run short of money to buy non-essential things such as going for a trip or a movie.

Here are four critical situations where using it is justified.

Job Loss Financial support – The recent situations, like COVID-19, have made jobs very unstable. One never knows when they might be laid off, and in such situations, having a safety net is very important. Having an emergency fund ready in such situations gives one some time to look for a new job while providing financial stability for some time.
Medical expenses – A comprehensive Health Insurance Plan is undoubtedly the best way to combat medical emergencies. However, health insurance has its limitations too, and might not cover specific treatments. Hence, to meet those treatments’ expenses, one must rely.
Emergency Home Repairs – While homeowners typically rely on insurance to cover home repairs, it might not cover all the expenses. In unforeseen damages, the funds help to address immediate repairs without delays.
Urgent travel expenses – Last-minute travel plans, whether for emergencies or any other reason, often require financial resources. Emergency funds help to cover these expenses without putting a strain on your pocket.

How Do You Calculate Your Emergency Fund?

These funds are created to help you take care of financial demands that arise without prior intimation.

Note down your monthly income: You have to include monthly income, your current salary, any second income, bonus, investment income, and any other income.
Calculate monthly expenses Note that monthly expenses include rent/mortgage, utilities, groceries, transportation, insurance premiums, loan payments, and other miscellaneous expenses.
Determine the monthly amount spent on small expenses, including dining out, shopping, movies, and small activities.
Calculate the amount spent on travel, including public transport and fuel, etc.
Evaluate the monthly amount spent, including college fees, medical bills, family support, etc.
Add Additional Expenses: Include other monthly expenses like monthly subscriptions (gym, OTT services, etc.), gifting, insurance premiums, holiday expenses, recharge, etc.

Emergency Fund = Monthly Expenses x Number of Months

Finally, total your monthly expenses + recreational activities + amount spent on dependent + travel + other monthly expenses and multiply them by six. You know, a lot of funds can be reserved for emergency funds.

Depends on how many months’ worth of expenses you want to cover with your emergency fund. The standard recommendation is usually between 3 to 6 months, but it can depend on your risk factors. It should be 6 times your monthly expenses. So, if you spend Rs. 40,000 per month, then your emergency fund should be Rs. 2,40,000.

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Best Ways to Invest Emergency Funds

The best places for emergency fund investment are:

A separate account other than your regular savings, so you won’t withdraw money regularly.
A savings account that grabs the most interest possible.
A readily available account for any emergency.

2. These are the key aspects of a high-yield savings account (HYSA). In a HYSA, you can earn high interest on your money and access it quickly without penalties or hassle.

3. A money market account is a special kind of savings account that can offer a higher interest rate to customers who save a large amount of money in their account. Money market accounts can provide a yield of about 3% to 4% interest rate. Some banks offer money market accounts that come with a debit card, which gives the facility instant access to your funds

4. CD stands for certificate of deposit. When you put money into this type of bank account, you’re telling the bank that you promise to let them hold onto your cash for a set amount of time. Your bank may offer a range of terms, commonly between a year and five years.

5. Generally, CDs get a higher savings rate than a standard savings account. However, one drawback of keeping an emergency fund in a CD, you usually incur a penalty for withdrawing funds before the CD matures. This makes it hard to access your money if required immediately.

Drawbacks of Emergency Funds

The primary drawback of emergency funds is that investing money into an emergency fund reduces the chances of allocating any additional funds for different programs, such as paying down a mortgage or retirement money savings, or paying down a mortgage. Thus, funds may be overhead in achieving financial goals.

By adding money to the emergency fund, a person expects fewer chances for high returns. If you are expecting a high return on investment money in the stock market, bonds, or certificates of deposit. It may provide inflation-beating returns and allow your savings to grow through compound interest. Thus, emergency funds provide the opportunity to use one’s money to generate more wealth. Emergency funds allow the chance to leverage one’s money for wealth generation.

Key Takeaways on Emergency Fund

It can be no less than a savior in times of economic crisis. However, the fund needs to be dynamic. If one adds a family member or upgrades one’s lifestyle, their emergency fund should also reflect the proportionate changes in expenses.
To increase the limit of emergency funds, one can take up a side job. CheggIndia is one such company that offers remote opportunities to freshers, students, or professionals looking for part-time remote jobs.
One can join CheggIndia as a Q&A expert and earn a hassle-free side income from the comfort of their home. One can choose any subject they are proficient in, from Engineering, Business, Earth Science, Healthcare, Mathematics, and more. Solve questions posed by students and get paid for each accepted answer.

Conclusion

Building and maintaining an emergency fund is a foundational step toward achieving long-term financial stability. It safeguards you against unexpected expenses, reduces reliance on debt, and brings peace of mind in uncertain times. Whether you’re just starting out or reviewing your financial plans, consistently contributing to your emergency fund ensures you’re always prepared. While the amount and method may vary based on individual needs, the goal remains the same financial resilience. By staying disciplined, monitoring your progress, and choosing the right savings tools, you create a secure buffer that empowers you to face life’s challenges without compromising your financial well-being.

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Frequently Asked Questions (FAQ’s)

How much are you supposed to have in an emergency fund?

The size of one’s emergency fund depends on various factors such as income, number of dependents, lifestyle, existing debt, etc. Although, the general rule of thumb is to set aside anywhere between 3-6 months’ worth of essential expenditure. Essential expenditure” refers to the expenses needed for day-to-day functioning.

What is the best for an emergency fund?

The best thing to do with an emergency fund is to deposit it in a savings account. This is because a savings bank account guarantees the liquidity of the funds. Liquidity is of high importance for an emergency fund. One can look for a savings account offering a reasonable interest rate. Moreover, there should be no minimum balance requirements or hefty maintenance charges.

Where should I allocate my emergency fund?

Allocating a total monthly fund into a designated bank account helps you to consistently grow and achieve the substantial savings you want. Preferably, you’d put your emergency fund into a high-yield savings account with high interest rates or you should use a savings account with a high interest and easy to cash that you’d need in an emergency.

What is an emergency fund?

An emergency fund is a dedicated savings account for unexpected expenses like medical bills, car repairs, or job loss. It should cover 3-6 months of living costs, providing financial security. For effective management, keep 10% in cash for immediate needs, 20% in a bank account, and 70% in a fixed deposit to earn interest while remaining accessible.

What’s the 50-30-20 budget rule?

The 50-30-20 budget rule is a simple guideline for managing your after-tax income. Allocate 50% to needs (essentials like housing and groceries), 30% to wants (discretionary spending like dining and entertainment), and 20% to savings and debt repayment. This balanced approach promotes financial health and flexibility.

What is the 3 6 9 rule in finance?

How much to save in your emergency fund: 3-6-9 rule. The basic guideline for emergency funds is to set aside enough money to cover your expenses for three, six, or nine months, depending on your needs and financial situation.

Which fund is best for an emergency fund?

Introduction To the Best Mutual Fund For Emergencies :

1. HDFC Liquid Fund.
2. SBI Liquid Fund.
3. ICICI Pru Liquid Fund.
4. Aditya Birla SL Liquid Fund.
5. Axis Liquid Fund.
6. Kotak Liquid Fund.
7. Nippon India Liquid Fund.
8. UTI Liquid Fund.

Where should I keep my emergency fund?

Emergency funds should be kept in safe, liquid, and accessible places like savings accounts, bank deposits, or liquid mutual funds. Avoid risky investments like stocks or long-term deposits.

What is an appropriate amount to have in your emergency fund?

Financial experts generally advise saving three to six months’ worth of essential living expenses in your emergency fund. For instance, if your monthly expenses total ₹40,000, aim to set aside ₹1.2 lakh to ₹2.4 lakh. Individuals with irregular incomes or additional responsibilities may consider saving up to 9–12 months’ worth of expenses for added security.

What is an emergency support funds from the government

An emergency support fund from the government is financial assistance provided during crises like natural disasters, pandemics, or unemployment to help individuals or businesses manage urgent expenses and recover quickly.

Authored by, Sakshi Arora
Digital Content Writer

Sakshi is a Content Creator and Strategist who specializes in crafting well-researched content across diverse topics including economics, finance, health, and more. She brings a fresh perspective to every piece she writes, always aiming to offer real value to her readers. When she’s not writing, you’ll likely find her curled up with a book—she’s a proud bookworm—or sipping on endless cups of chai, her favorite obsession.

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