There is a difference between liquid and volatile. Index funds are definitely a liquid instrument, but they are very volatile.<p>For funds that you know you will need in the next six months to three years, it is recommended to keep the funds in a liquid and very stable investment.<p>Personally, I use a California (I live in CA) tax free short term bond fund.<p>What type of expenses do I keep in this kind of fund? Tax payments I know I already owe (capital gains from an IPO for example), child&#x27;s college tuition payments,  planned major house repairs &#x2F; remodels, pending car purchases, and as others have mentioned six months of living expenses in case of layoff or other emergencies.