But the better question is:
How long could you cover essentials if income stopped, without being forced to sell investments or take on bad debt?
That duration is your runway.
Step 1: Define “essential expenses” (not total spending)#
Essential expenses are what keeps you housed, fed, insured, and functional:
- housing (rent/mortgage)
- utilities
- groceries
- transport to work
- minimum debt repayments
- insurance
- basic healthcare
If you include everything you spend money on, the number becomes unrealistic and you’ll never finish.
Step 2: Choose a runway that matches your constraints#
A common baseline is 3 months. That’s not magic — it’s just a useful starting point.
Increase the runway if you have more constraint:
- variable income (commission, contracting, self-employed)
- single-income household
- dependents
- high fixed costs
- higher job-search time in your industry
- low access to credit (or you don’t want to rely on it)
Decrease it if your life is unusually stable and flexible.
Trade-off: bigger buffer = less invested today. Smaller buffer = higher chance you’re forced into a bad move later.
Step 3: Do the maths#
Emergency fund size = essential monthly expenses × runway months
Example:
- essential expenses: $3,500/month
- runway: 4 months
- buffer target: $14,000
This does not need to be perfect. It needs to be usable.
Step 4: Build it without relying on motivation#
Most people don’t fail because they don’t understand the concept.
They fail because there’s no system.
Simple build method:
- open a separate account (or use an offset)
- automate transfers on payday
- increase the transfer amount when income rises
Even a partial buffer reduces pressure. The first dollars saved do the most work.
Step 5: Keep it boring#
A buffer that can drop 20% is not a buffer.
If you want returns, that’s what the investment portfolio is for. The buffer is what stops you raiding it.
Quick FAQ#
Is 3 months enough?#
Sometimes. It’s a good baseline. If your income is variable or your obligations are high, 6+ months is more realistic.
Should I hold it in cash?#
Generally yes — savings account or offset. The goal is stability and access.
What if I have debt?#
If the debt has high interest, getting rid of it often behaves like a risk-free return. But don’t “optimize” so hard that you end up with no liquidity.