Emergency Fund: It’s crucial to have immediate access to cash in case of a sudden health issue, home repairs, a job loss, or any other unexpected expense. That’s why people are always advised to create an emergency fund. This is a safe deposit box that you can access immediately during difficult times, without significant losses or financial stress.

What is an emergency fund?

An emergency fund is a sum of money set aside solely for emergency needs. It should not be used for everyday expenses or investments. Its purpose is to ensure that you can remain comfortable in the event of a sudden financial emergency and are not forced to take out a loan or break your savings.

Three main options for creating an emergency fund

Bank Savings Account
Fixed Deposit
Post Office Schemes

Savings Account

A simple savings account gives you the fastest access. You can transfer money in seconds using UPI, cards, ATMs, and netbanking, which is essential for emergencies. Interest rates are typically low and subject to change, but the funds are always available and provide a clear record of transactions.

Account holders should adhere to the minimum balance requirements for their savings accounts and, if necessary, use the swipe-in ​​facility to automatically transfer excess funds to short-term deposits. It’s best to keep the immediate withdrawal portion in a savings account.

Bank FD

Bank fixed deposits are ideal for the portion you don’t need immediately. Short-term FDs (7 days to 1 year) offer guaranteed returns and are insured under the DICGC up to ₹5 lakh per bank. Withdrawals are easy, but not instant. Premature withdrawals may attract a small penalty or lower interest. If safety and assured returns are your top priority, keep a portion of your funds here and invest in FDs with different maturities so that some amount is available every few weeks.

Post Office

Post Office savings accounts and schemes offer secure returns backed by a government guarantee. Withdrawals from a regular savings account are generally easy, but some transactions are processed only during branch hours, so it’s not available 24/7 like a bank app. For small investors who don’t want to take on too much risk, this is a good option for parking a portion of their funds, especially money that isn’t needed immediately overnight but is easily accessible during the day.

How to maintain an emergency fund?

Generally, the emergency fund should be divided into three parts: the first part is for immediate use, the second is safe and requires a short time to use, and the last is safe but requires a little delay. Savings accounts are the fastest access option. You can transfer funds in seconds using UPI, ATMs, and netbanking. Interest rates are low, but they’re ideal for quick cash needs.

Bank FDs are for short-term funds. Short-term FDs (7 days to 1 year) offer safe and guaranteed returns. You can break the FD if needed, but there will be a small penalty or lower interest. The post office offers a government guarantee and fixed rates. While not instant, withdrawals are possible within a few hours. This is especially true for the portion that can be withdrawn during the day, rather than at night.

Keep these things in mind while creating an emergency fund

Always keep money equivalent to 24–48 hours of expenses in a savings account or small fixed deposit for immediate use. An amount equivalent to one to two weeks’ expenses should be kept available at first.
Keep the remaining amount in a long-term fixed deposit, which can be broken if needed.