Building the emergency fund is the hard part. But where you put it decides whether it works when you need it — and most of the mistakes are made here.

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Three requirements, in order

1. Reachable within a day. An emergency that has to wait a week for a redemption is not covered. This rules out anything with a lock-up.

2. Stable in value. You need to know the number will be there. Anything that can be down 30% on the morning you need it is disqualified, however good its long-run returns.

3. Earning something. Not a lot. Just enough to slow what inflation takes.

Notice that returns come third. This is the one pot where that is the correct order.

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Reasonable homes

• High-yield savings account — simple, instant, and the interest is real if unspectacular.
• Money market fund — usually a better rate, typically reachable within a day or two. Check the actual redemption time before you rely on it.

Split across two if it helps you sleep. There is no prize for elegance here.

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Poor homes, and why

• Current account. Costs you the most and earns nothing.
• Cash at home. No interest, and full exposure to theft and to your own convenience.
• Anything with a lock-up. A fixed deposit maturing in ninety days does not cover an emergency today.
• Investments. The whole purpose of the emergency fund is to stop you selling these at a bad moment. Putting the fund in them defeats it entirely.
• Money you have lent to someone. That is not a fund. That is a hope with a relationship attached.

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Do this today

Work out one month of essentials — rent, food, transport, power, data, healthcare. Multiply by three. That is the target, and until you hit it, it comes before investing.