By Ashish Malaviya · First published 2/11/2026

Emergency Fund: How Much to Keep and Where to Keep It

Learn how essential expenses, dependants, job stability, EMIs and access needs shape an emergency fund, plus ways to rebuild it after a withdrawal event.

An emergency fund is money set aside for unpredictable, essential and urgent expenses. This is not for planned holidays, phone purchases or annual insurance. It can provide you with some breathing space if your income is interrupted or you have a large unexpected expense. Whilst emergency funds will not give you the best returns, it can provide access to your funds when you need it.

How much should you save?

Depending on your situation, the amount you should save will be different. If you’re a salaried worker with a steady income and few dependents, compared to someone who works as a freelancer with unpredictable income or a family that has parents/children to support, the risk factors will be different. However, a good place to start is looking at your essential monthly costs. From here you can adjust the amount depending on your income stability, debt and responsibilities.

Essential costs

Start by thinking about what essential costs you have. This could include rent/mortgage, basic food items, utility bills, transport to/from work, medication, insurance, school costs and the minimum loan payments. From here you can think about what you can reduce during a tough time. This doesn’t need to be an exact budget, just an estimate of what you’ll still need to pay even if your income drops suddenly.

Let’s say your essential costs are £35,000 per month. This means you’d need £105,000 for 3 months and £210,000 for 6 months. This is purely an example of how to calculate. Depending on whether your income is unstable, you have 1 main earner and dependents relying on your income or you might struggle to find a new job, you may want to save more. However, everyone’s situation will be different.

Dependents, EMIs and job stability

You may have dependents which can affect your situation. If you have parents/children or another family member relying on your income, you may want to save more so you can still cover their essential costs. Medical costs can also be unpredictable. Although you may have some insurance to cover some costs, you may still have to pay some out of your own pocket.

It’s important to consider any loans you have. Usually, you’d still have to pay your home loan, car EMI or whatever you have to repay on a schedule. You’ll want to include the minimum you’d have to pay in your essential costs. Just because you’re unemployed or had an emergency, doesn’t mean your lender will allow you to pause paying.

Your job stability can affect how long you may be without an income. This depends on the industry you’re in, how many employers you have, the contracts you have, notice periods and how long it would take to find a similar job. If you’re self employed or a freelancer, you may also need to consider late invoicing or a customer who stops paying. An emergency fund is to help with uncertainty.

Where to put the money?

Accessibility is key. If your emergency fund is in something that can fluctuate in value, you may lose money at the same time you need it. If you put your money into something with restrictions, penalties or long settlement times it could be inconvenient. The returns aren’t as important as knowing you can access it.

A savings account in a bank is a good choice. However, you may want to look into other deposit options. Make sure you know the terms of the institution, how quickly you can access your money and what protections are in place. In India we have DICGC which insures deposits, however this is only applicable if you meet the criteria and has limits. Please refer to the official explanation. Mutual funds, shares and other market related products aren’t deposits.

Some households may want to have some money easily accessible and some in a suitable account/deposit with clear terms. Keep it simple so you can access it in a stressful situation. Don’t spread your money across too many accounts that you won’t remember where it is.

Costs of having the money in cash

Having the money in a low return account may mean you’re not getting as much as you would if you were investing for the long term. However, if you have to sell something that can fluctuate in value during a downturn due to an emergency, you may lose out or have to pay fees. If you have the money locked away, you may have to borrow at a high rate to cover an urgent expense.

Your emergency fund shouldn’t be ranked based on the job it does. Investing for the long term and saving for emergencies are two very different things. Trying to combine them can cause conflict when you’re in a tricky situation.

Building up

Having a large target can be daunting if you haven’t saved much. Setting some goals can help you track your progress. Start with covering a small emergency, then work towards 1 months of essentials. Continue to build up to a larger amount based on your situation. These are just goals.

Setting up automatic transfers can help you save after receiving your salary. However, ensure you’re not causing any bills to bounce. Having it in a separate account or labelled clearly can help prevent you wanting to use it for planned purchases. Using windfalls, refunds or sporadic extra income can help you build it up. However your main plan shouldn’t rely on this.

What is an emergency?

Sudden medical costs, essential home repairs, a loss of income or an urgent family trip could count. However, something like an annual insurance payment isn’t an unexpected cost as you knew it would come. This should go in your annual budget. Upgrading your phone is usually a planned purchase. Having clear definitions can help prevent you dipping into your fund.

Sometimes situations can be unclear. A car repair may be essential if you need it to get to work, however if you have another affordable option of transport it may not be. A family event may be important to you but not an emergency. You can set your own boundaries and review how much you’ve taken out after the situation has passed.

Refilling

Using your fund isn’t a bad thing, that’s why it’s there! Once your emergency has passed, note down how much you used. Have an estimate of when you can realistically refill. If you’ve had a large withdrawal, you may want to cut back on your optional costs temporarily. However, you should still ensure you’re covering your essentials. Don’t try to refill straight away by borrowing at a high rate or investing all your remaining cash into a risky investment.

Sometimes you may realise that your target was too low. If you had to use most of your fund for an urgent bill, you may want to reassess how much you should have. Alternatively, if you keep using it for a planned purchase, you may want to set up a separate sinking fund in your budget.

Common mistakes

A common mistake is to count your credit card limit as an emergency fund. Whilst borrowing can be useful in some situations, it isn’t cash you own. Another mistake is to put all of your emergency fund into an investment which can lose value. Lastly, you may set your target based on someone elses salary or social media rule. Your target should be based on your expenses and risk of your income.

Don’t forget to think about any irregular essential costs. Annual insurance, car servicing, school and medical costs can all be budgeted for separately. This way your emergency fund is there for any real surprises. You may want to reassess how much you have if you’ve moved house, changed jobs, added a new dependent, EMI or if there have been any big changes to your household costs.

Conclusion

Having an emergency fund can give you some flexibility. How much you have should depend on your essential costs, dependents, debt payments and how reliable your income is. Where you save it should be accessible and you should understand the risk. An emergency fund isn’t there to give you the best returns, it’s there to help you. Build it up in manageable chunks and use it if you really are in an emergency. Once your household is stable, refill it.

Separate emergency fund from planned purchases

A good way to help you keep your emergency fund is to have separate pots for your predictable irregular costs. This could include car insurance, annual payments, school admissions, festival travel and scheduled repairs. This means you won’t have to label them as emergencies when you receive the bill. It can also help you see if your monthly budget is actually balanced.

If you’re a cash user, keep it simple and just track how much you’ve taken out and put in. If you have multiple bank accounts, keep a secure note of what the account is for and how to access it. Don’t share your full details and don’t keep your passwords in an unsecured spreadsheet. It won’t help if you can’t access it safely.

When to change your target

Having a new child, parent moving in, mortgage, changing from a salaried worker to self employed or having a long search for a job can change your risk. Instead of using your target from years ago, recalculate your essential costs. If your costs have decreased, for example you’ve paid off a loan or your dependents have become financially independent, you may want to reassess your fund. Don’t feel obliged to keep the number the same just because it felt like enough.

The aim is to have some resilience. Your target should be based on your real risk factors and be accessible.

Continue reading

• Put the buffer into a wider plan with Budgeting on an Indian Salary.
• See how loan obligations affect cash flow in EMI vs Prepayment.

Educational information only. Verify current rules and consider qualified advice for personal decisions.