An emergency buffer (sometimes called an emergency fund or cash runway) is a pool of accessible savings set aside to cover essential expenses during unexpected disruptions. The term "runway" refers to how long someone could sustain their essential costs without income, measured in weeks or months. This article explores how a buffer functions as a risk-control tool, why investing without one introduces both financial and behavioural risk, and how people typically think about sizing one.
This is general educational information, not personal financial advice.
What an Emergency Buffer Actually Does#
The purpose of an emergency buffer is not to earn returns. It is to provide optionality. When income stops or a large unexpected expense arrives, having accessible cash means choices remain open.
Without a buffer, options narrow quickly. Bills still arrive. Rent or mortgage payments do not pause. A car repair, a week off work, and a down month in markets can arrive together. In these situations, people often face a difficult set of alternatives: taking on high-interest debt, selling investments at an inopportune time, or missing payments entirely.
A buffer changes the dynamics. It absorbs the shock and buys time. The goal is not to maximise growth on these funds. It is to ensure they are available when needed, without penalty or delay.
In behavioural terms, a buffer also reduces cognitive load. Research indicates that people without emergency savings spend significantly more time worrying about finances than those with even modest reserves.¹ Financial stress consumes mental bandwidth, which can affect decision-making across other areas of life.
The Liquidity Mismatch Problem#
Investing is, by design, a long-term activity. Returns are uncertain in any given year. Markets move up and down, sometimes sharply. The expected payoff from accepting this volatility comes from staying invested over extended periods.
This creates a timing mismatch when someone invests money they may need soon. If an emergency arises and the only available funds are in a volatile investment, they may be forced to sell, regardless of whether the market is up or down.
This is sometimes called liquidity risk: the risk that assets cannot be converted to cash quickly enough, or only at a significant discount. For individual investors, this often takes the form of selling during a downturn because cash is needed immediately, not because the investment itself has failed.
Research on institutional investors illustrates how liquidity pressure can amplify losses. Studies of mutual fund flows show that when funds face redemption pressure, the resulting selling activity is associated with worse price outcomes and increased downside risk for the underlying assets.² While this research focuses on institutional dynamics rather than household behaviour, the underlying principle is similar: selling under pressure, rather than by choice, tends to produce worse outcomes.
Beyond the financial impact, forced selling introduces behavioural costs. Watching an investment fall while simultaneously needing cash creates stress. Decisions made under this pressure are often regretted. Some investors, having experienced a forced sale during a downturn, become reluctant to invest again, even when their situation stabilises.
Behavioural Risk: Why Buffers Affect Decisions#
A less obvious function of an emergency buffer is its effect on investment behaviour. Research in behavioural finance suggests that emotional stability significantly influences how investors respond to market volatility.³
Without a buffer, every market dip carries an implicit question: "What if I need this money?" That uncertainty can amplify fear and increase the likelihood of panic selling. Even if the money is not technically needed, the awareness that it might be needed creates psychological pressure.
With a buffer in place, this pressure eases. The invested portion becomes genuinely long-term because the short-term needs are already covered. This separation reduces the temptation to check balances frequently, react to headlines, or make impulsive changes.
Research from Vanguard found that having three to six months of essential expenses saved was associated with a measurable improvement in financial well-being, independent of income or total assets.¹ Part of this effect appears to be psychological: the buffer provides a sense of control that translates into calmer behaviour.
In this sense, a buffer is not just a financial tool. It is a behavioural guardrail. It creates the conditions under which long-term investing becomes psychologically sustainable.
How People Think About Sizing a Buffer#
There is no universal answer to how large an emergency buffer needs to be. The commonly cited range is three to six months of essential living expenses, but this figure is a starting point, not a rule.
In Australia, the government's financial information service (MoneySmart) suggests three months of expenses as a reasonable goal for most households.⁴ Many financial planning guides extend this to six months, particularly for people with less stable income or higher fixed costs.
The variation reflects the reality that risk profiles differ. A permanent employee with a dual-income household and no dependents faces different exposure than a sole-income freelancer with a mortgage and children. The buffer exists to cover the gap between when income stops and when it resumes (or when expenses can be restructured). The length of that gap varies.
Some factors that tend to increase the useful size of a buffer include:
| Factor | Why It Increases Buffer Needs |
|---|---|
| Variable or contract-based income | Gaps between income can be unpredictable and longer |
| Single-income household | No backup earner to cover shortfalls |
| Dependents (children, elderly parents) | Expenses are less flexible and cannot easily be reduced |
| High fixed costs (mortgage, debt repayments) | Monthly obligations continue regardless of income |
| Limited access to credit or insurance | Fewer fallback options if savings run out |
| Industry with longer job search times | Re-employment may take months, not weeks |
Conversely, people with highly stable income, low fixed costs, and strong access to credit may find that a smaller buffer provides sufficient coverage.
The key insight is that the buffer is typically sized relative to personal circumstances, not to a generic benchmark. The question is not "What do experts recommend?" but "How long could I manage if income stopped, and what would I need to cover during that time?"
What Counts as Essential Expenses#
When calculating a buffer target, the focus is on essential expenses, not total spending. Essential expenses are those that must be paid regardless of circumstances: housing, utilities, food, transport to work, minimum debt repayments, insurance, and basic healthcare.
Discretionary expenses (entertainment, dining out, subscriptions, hobbies) can typically be reduced or paused in an emergency. Including them in the calculation inflates the target unnecessarily.
One common method is to review a few months of bank statements and identify which expenses would continue even in a crisis. That figure, multiplied by the desired number of months, provides a rough target.
For example, if essential monthly expenses total $3,500:
| Buffer Target | Amount |
|---|---|
| 3 months | $10,500 |
| 6 months | $21,000 |
These figures are illustrative. The appropriate target depends on individual circumstances.
Where Buffers Are Often Held#
Emergency buffers are often held in forms that prioritise accessibility and stability over returns. The following are examples of where people commonly keep buffer funds, not recommendations:
- High-interest savings accounts: Accessible, no penalties for withdrawal, interest rates vary by provider
- Offset accounts: Available to mortgage holders, where the balance offsets interest on the home loan rather than earning separate interest
- Term deposits with short maturities: Slightly higher interest than savings accounts, but funds are locked for a fixed period
The trade-off is intentional. Funds in a savings account earn less than funds invested in shares or property. But the purpose of a buffer is not to generate returns. It is to be available without delay or loss of value when needed.
Holding the buffer separately from everyday transaction accounts can help reduce the temptation to dip into it for non-emergencies. Some people use a different bank entirely to create friction. Others label the account explicitly (e.g., "Emergency Only") as a psychological reminder.
The Opportunity Cost Question#
A common concern is the opportunity cost of holding cash. Money sitting in a savings account is not growing at the same rate as money invested in shares. Over long periods, this difference compounds.
This is true in a narrow sense. But the framing can be misleading. The buffer is not competing with investments for the same purpose. It is serving a different function entirely: providing stability and optionality.
Attempting to invest the buffer to avoid opportunity cost reintroduces the liquidity risk the buffer was meant to solve. If the buffer is invested and markets fall just as income stops, the result is a forced sale at a loss, which is often worse than the foregone returns.
One way to think about this is that the buffer is not "doing nothing." It is buying peace of mind, reducing the risk of forced selling, and making it psychologically possible to stay invested with the rest of the portfolio. These are valuable outcomes, even if they do not appear on a statement.
Building a Buffer Over Time#
For those starting from zero, accumulating several months of expenses can feel daunting. One common approach is to start small and build incrementally.
Research suggests that even modest savings provide measurable benefits. Vanguard research (US-based) has reported that even relatively small emergency savings are associated with meaningful improvements in financial well-being compared to having no buffer at all.¹ The pattern suggests that the first dollars saved provide proportionally larger stress reduction than later dollars.
Automating transfers to a separate account on payday (the "pay yourself first" principle discussed elsewhere in this series) can help build the buffer without requiring ongoing willpower. The amount can start small and increase over time as cashflow allows.
The goal is progress, not perfection. A partial buffer is better than none. And once the buffer reaches a comfortable level, the same automation can be redirected toward investing.
Summary#
An emergency buffer is a risk-control tool, not a missed investment opportunity. It reduces liquidity risk (the chance of being forced to sell investments at a bad time), lowers financial stress, and creates the conditions for calmer decision-making. The commonly cited target of three to six months of essential expenses is a starting point, but the appropriate size depends on income stability, fixed costs, dependents, and personal circumstances.
This idea is often framed not as conservatism, but as realism. Life involves uncertainty, and a buffer absorbs that uncertainty so that investments can be left to do their job over the long term.
Sources#
- Vanguard. (2025). Emergency savings may hold the key to financial well-being. Vanguard Institutional. https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/emergency-savings-may-hold-key-financial-well-being.html (Accessed January 2026)
- Cao, J., Han, B., & Wang, Q. (2024). Mutual fund illiquidity, selling pressure, and left-tail risk. Economics Letters, 243, 111896. https://doi.org/10.1016/j.econlet.2024.111896
- Gambetti, E., & Giusberti, F. (2020). Personality, decision-making styles and investments. Journal of Behavioral and Experimental Economics, 80, 14-24. https://doi.org/10.1016/j.socec.2019.03.002
- Australian Securities and Investments Commission. (2024). Save for an emergency fund. MoneySmart. https://moneysmart.gov.au/saving/save-for-an-emergency-fund (Accessed January 2026)