Warren Buffett’s cash cushion formula that 90% of Indian investors ignore

A few years ago, a friend faced a sudden job loss in Mumbai. And with the high rentals in Mumbai, clubbed with the astronomical cost of living in general, life became tough. So, with rent due and not much savings to fall back on, he maxed out his credit card, paying huge sums in interest for months. That is not a rare story in India honestly. We have heard it too often in India, where according to RBI, only 30% have an emergency fund. In my opinion, that’s an optimistic number. Anecdotal evidence would suggest, the number is probably closer to 10%.

That is where Warren Buffett’s wisdom comes in. The Oracle of Omaha, who has built Berkshire Hathaway into a $1 trillion enterprise, swears by keeping cash at hand for the curveball’s life throws at you. “We always maintain at least $20 billion—and usually far more—in cash equivalents,” he wrote in his 2014 shareholder letter. His current holding is nearly US$ 350 billion.

For Indians struggling with rising costs and job uncertainties, Buffett’s approach to liquidity offers a practical blueprint for financial security. Let us see how you can build a “Cash Cushion”, Indian style, with Buffett’s timeless advice holding the torch.

Why Indians Need Buffett’s Cash Cushion Strategy

Let’s be honest. In India, life is not some smooth ride. There are challenges everywhere. For instance, the general cost of living, with inflation hovering at 5.5%. This pushes up the price of everything upward, from dal to diesel. Urban unemployment is at 7% (CMIE, 2024), and medical emergencies can cost Rs 50,000–2 lakh (IRDAI, 2024). One very viral quote rightly summed up with “An Indian middle-class family is just one medical emergency away from poverty.”

With 60% of urban youth living paycheck-to-paycheck (EY, 2024), a single crisis can spiral into debt. We have probably all seen friends or relatives borrow at astronomical interest rates for hospital bills.

Buffett’s obsession with liquidity—keeping cash serves a twofold purpose.

First, when a big opportunity comes knocking, you will always have cash in hand to make the most of it.

And secondly, when emergency strikes, you do not have to sell your assets or stocks to meet your needs. The whole idea is to avoid forced decisions and it resonates in India, across the board.

Buffett’s Berkshire holds massive cash reserves to grab opportunities or survive during tough times. In his 2008 letter, he noted, “Cash… is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.” For you, the cash cushion is that oxygen—a buffer to cover rent, EMIs, or unexpected repairs without derailing your SIPs or retirement dreams. Or use it when markets crash and great stocks are available at lucrative value.

Here is a 4 Step Strategy derived from the ways of Warren Buffett to create a cash cushion.

Step 1: Size Up Your Safety Net

Warren Buffett is all about clarity. So, the very first task is figuring out HOW MUCH you need to save. That is one area where most fail. Always remember, you cannot manage, what you cannot measure. Now this is not a recommendation at all, but many experts suggest 6–12 months of living expenses is what you must have as a reserve.

Imagine that you are a Mumbai-based professional spending about Rs 50,000 monthly on rent, groceries, and transport, a 6-month fund is Rs 3 lacs. Single-income families or freelancers, which make up of 20% of India’s urban workforce, might want to aim for 12 months (Rs 6 lacs). That’s the bare minimum. Once you factor in other expenses, for instance, school fee, money for medical emergencies et cetera, the number could be a multiple of this.

Here is how to get it done with ease:

• Track your must-haves: Note down rent (say, Rs 20,000), groceries (Rs10,000), utilities (Rs 5,000), and transport (Rs 5,000). Skip the OTT subscription or weekend plans with friends if necessary. A simple excel sheet could be useful for this. Or pick from a long list of apps available. But include expenses like medical emergencies, school/other committed fee et cetera. Say all that adds up to Rs 60,000.
• Set your target: Multiply by 6–12 months. A Rs 100,000 like for the calculation above, emergency fund, or like we call it the ‘Cash Cushion’, needs Rs 6 lacs to Rs 12 lacs.
• Factor in risks: Lean towards a 12-month number if you are a freelancer or work in volatile sectors like IT.

Buffett’s advice here is simple, “Do not save what is left after spending, but spend what is left after saving” which makes all the sense in the world. Start small, cut that couple of thousands on impulse and see your savings boost. Learn to prioritize cash over short-term gratifications like a new phone or a laptop. Buffett used a Samsung flip phone till 2020 and switched to iPhone 11 post that, which he apparently still uses. The iPhone, in case you are wondering, was a gift from Apple’s boss, Tim Cook!

Step 2: Pick a Safe, Accessible Spot

Here is a big catch. Unlike the average Indian, Buffett does not chase returns on his cash reserves. His aim is just this: safety and access. Your cash cushion needs the same: instant access, no losses, and returns beating inflation (5.5%). Here is how one can probably achieve that in India:

• Savings Accounts: Save your money in a savings account. Based on how much you save, it could fetch you anywhere between 3% to 7%, with UPI or ATM access. Keep 1–2 months’ expenses here (e.g., Rs 80,000). There is no dearth of banks looking to have more savings accounts onboard.
• Liquid Mutual Funds: These offer 6.5–7% (2024) with withdrawals in 1–2 days. Low-risk options like liquid funds are Buffett-approved for safety. There are a handful of apps which could help you do that. Pick a liquid fund that invests exclusively in the highest rated securities.
• Short-Term FDs: These give a yield 6–7% for 90–180 days. Remember to choose FDs with early withdrawal to have the flexibility with you, but do not lock in everything in… penalties sting. And yes, choose a solid bank to do the FD.
• Recurring Deposits: Effortless way to build your fund with as low as Rs 5,000 monthly at 6.5%. Perfect for disciplined savers who like to start small but keep at it with discipline.

Note that you must stay away from stocks or long-term FDs for the cash cushion, as Buffett cautions: “Risk comes from not knowing what you’re doing” (1993 letter). You do not want to be left with your own money stuck somewhere… Imagine a super stock like MRF falling by 25% (hypothetically) and your money is locked away and you cannot make anything of this opportunity. Or God forbid, a medical emergency needs your attention, but you cannot, thanks to the lock in period.

Step 3: Save Like Buffett—Consistently

When you look at Buffett’s empire, you must remember that his wealth comes from relentless consistency, and your cash cushion needs the same. “Someone’s sitting in the shade today because someone planted a tree a long time ago,” he once said. Here is how to grow your cushion on your salary:

• Automate it: Set a monthly auto-debit to a liquid fund via net banking. DO it consistently for as long as a big opportunity comes knocking. Go for the maximum amount for the auto debit.
• Trim the fat: Cut a couple of the OTT subscriptions or cut down on the monthly cab rides. Maybe order a wee bit less on the delivery app. Redirect it to your cash cushion. Did you know Buffett used to spend not more than $3 on his breakfast every day, a consistent habit for years. He revealed that in an interview, in 2017!
• Use windfalls wisely: The next time you get a bonus, a big commission, or some surprise money, just put 50% of it towards your cash cushion. Only 50% of it! You can still have a good time while growing your cushion.

For a Rs 4 lac cash cushion, Rs 10,000 monthly takes 40 months. Track it excel, Google Sheets or an app of your choice. Your cash cushion is your own wonderful business, give it time.

Step 4: Protect and Use It Wisely

The cash cushion is not a one-and-done deal; it needs care and consistent effort. Buffett has had a very meticulous approach for Berkshire’s cash, which should be an average Indian’s way of doing it as well. “We never want to be forced to sell securities at distressed prices,” he wrote in 2009. Here is how you can manage yours:

• Replenish fast: If you dip into Rs 60,000 for a hospital bill or after you invest a good opportunity, resume the monthly savings to rebuild. Probably increase the amount by a bit.
• Update it: Life is not a straight road. It is a bumpy ride. Marriage or a having a kid could bump expenses to Rs 60,000, so adjust your target to a bigger amount like may be 6 lacs for 12 months.
• Use it right: Save it for job loss, medical crises, or urgent repairs… Or investing in a big, rare opportunity that could help grow it manifold—not iPhones or Goa trips.

Do not forget to review returns every 6 months! Switching to better liquid funds if rates rise could always help.

Tackling India’s Cash Struggles

Let us be honest. Saving cash in India is tough. You never know where the next big expense might come from. And most Indians are not ready for it when it comes. Here are some pointers:

• Low income?: Start with Rs 1,000 in a savings account. It might not sound like a big one, but it teaches you discipline of saving, no matter what happens. So, when you are equipped to save big, the indiscipline does come back to punch you in the face.
• Debt woes?: Pay off high interest credit card debt first without fail, but do not forget to still save to build momentum.
• Society pressure?: You cannot be the Tom Cruise who keeps sending the most expensive cakes to everyone in his list. If society’s standards demand eating into your cash cushion, it would not hurt to skip a few gatherings. In case of family, explain to them what you are doing and why. Help them get the priorities straight.

The Payoff: Peace of Mind

Cash Cushion is not just cash. It is infact freedom. Freedom from being broke, freedom to be able to buy in the next big opportunity, freedom to be able to manage an emergency without having to ask relatives for money or going into high interest credit. Remember what Buffett said in one of his talks in 1990’s, “The most important thing is to be able to sleep well at night”. A cash cushion makes you ready for most of the good or bad things life can throw at you.

In 1998, Buffett wrote in one of his letters “It’s better to be approximately right than precisely wrong”. In simple words, he urges for action over perfection. Start building your cash cushion today and sleep better knowing you are ready for anything.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Suhel Khan has been a passionate follower of the markets for over a decade. During this period, He was an integral part of a leading Equity Research organisation based in Mumbai as the Head of Sales & Marketing. Presently, he is spending most of his time dissecting the investments and strategies of the Super Investors of India.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article. 

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