In Part 1 of this series, I shared why I don't aggressively build a large emergency fund. My safety comes from layers - insurance, some income flexibility, and a small savings cushion I dip into and refill the next month.
If you missed that piece, I'd recommend reading it first. [https://figuringoutmoney.blog/emergency-fund-in-your-20s]
But a question I've been sitting with since writing that article:
Even for the small buffer I do keep - am I storing it in the right place?
Right now, mine sits in a savings account. Accessible, simple, zero drama. But I've been doing some reading, and I think there's a smarter way to structure even a small cushion without giving up the liquidity that makes it useful in the first place.
This is me thinking out loud - not a prescription. I'll put a proper note on that at the end.
Where most people keep it: savings account
This is where my own buffer lives right now, so I'm not dismissing it.
The case is obvious: instant access, no market risk, UPI-ready at 2am during a crisis.
But here's the part I didn't think about until recently - SBI recently cut its savings deposit rate to 2.5%, with several other public and private sector banks following. Most savings accounts today are somewhere between 2.5-3.5%.
With inflation running higher than that, money sitting here is slowly losing purchasing power. Not dramatically. Not in a way you'll notice month to month. But over a year or two, it adds up.
For truly immediate needs - a bill that can't wait 24 hours, a medical gap that needs cash tonight - a savings account is irreplaceable. But parking your entire buffer here just because it's familiar is leaving something on the table.
What I'm researching: liquid mutual funds
I haven't moved my buffer here yet, but this is what I've been looking into.
Liquid funds invest in very short-term government securities and treasury bills - instruments maturing within 91 days. Lowest-risk category in the mutual fund universe. Not zero risk, but close.
On average, liquid funds in India have delivered 6-7% annual returns - significantly higher than the 3-4% offered by standard savings accounts.
The real-number version: Rs 50,000 in a savings account at 3% earns Rs 1,500 a year. The same Rs 50,000 in a liquid fund at 6.5% earns Rs 3,250. Same money, same rough risk profile, double the return just from where it sits.
The access question is the one I kept coming back to. Turns out, some AMCs offer an instant redemption facility where you can withdraw up to Rs 50,000 or 90% of your investment - whichever is lower - even on weekends and holidays. Anything above that typically lands the next working day.
For most emergency scenarios, that's fast enough.
Platforms like Groww or Zerodha Coin let you get into a liquid fund in under 5 minutes. Direct Plan only - lower expense ratio.
The FD question - and why I'm looking elsewhere
I've never used an FD. The lock-in structure bothers me more than the returns attract me.
Breaking an FD early typically costs a penalty of 0.5-1% on interest. For an emergency fund - money you might need at the worst possible moment - that penalty feels like exactly the wrong design.
What I find more interesting as a potential third layer: short-duration debt funds. Similar logic to liquid funds, slightly longer maturities, potentially marginally better returns, and no premature withdrawal penalty unlike FDs.
I haven't used these either. Still researching. But for anyone who likes the idea of FD-like stability without the exit cost, worth looking into.
Where emergency money clearly doesn't belong
This part isn't controversial:
- Equity mutual funds - markets don't care about your timing
- Stocks - same problem, more volatile
- Crypto - no
- PPF, ELSS, or any lock-in product - not emergency money by definition
How I'm thinking about restructuring this going forward
Based on what I've read, a simple split makes sense to me:
- 1 month of expenses in savings account - truly instant, zero friction
- Remaining buffer in a liquid fund - earning more, still accessible within a day
That's it. No complicated three-tier system. Just not letting all of it sit at 2.5% when it doesn't have to.
Tip: Check if your liquid fund app has instant redemption enabled
Most platforms have this sitting in the fund settings. Under this facility, up to Rs 50,000 can be withdrawn instantly - even on weekends - with no cut-off time restrictions. If you're going to use a liquid fund as part of your buffer, this feature is what makes it genuinely work for emergencies.
A note before you do anything
I want to be straightforward here: I'm 24, I work a corporate job, and I'm figuring this out as I go. Nothing in this article - or any article on this blog - is financial advice. I'm not a certified financial planner, not a SEBI-registered advisor, nothing like that.
I share what I'm reading, what I'm thinking, and what I'm doing with my own money. Sometimes I'll be wrong. Sometimes what works for my situation won't work for yours - different income, different obligations, different risk appetite.
Before making any changes to how you handle your money, do your own reading. If the amounts are significant, talk to an actual certified financial planner. Don't make decisions based on what a 24-year-old on the internet told you.
That said - I genuinely hope this gave you something useful to think about.
Final word
Your buffer doesn't have to be a large corpus. I've made that case already.
But whatever amount you decide to keep - it shouldn't just be dying in a savings account at 2.5% if there's a smarter place for it that's just as accessible.
One month in the bank. The rest somewhere working slightly harder.
That's the direction I'm heading. Still figuring it out - same as you.
Got questions or a different approach that's working for you? Drop a comment.