Emergency fund
Also called: rainy day fund, runway
Cash set aside to cover unexpected, necessary and urgent costs, so they do not become debt.
Three tests, all of which must apply: unexpected, necessary, urgent. A car repair qualifies; an annual insurance renewal does not, because it was expected and belongs in ordinary budgeting.
Size it on essential spending, not income. You are insuring your outgoings, not your payslip, and in a month where you actually draw on it the non-essentials stop anyway. This usually cuts the target by a third or more.
Three to six months is the common range. The benefit is heavily front-loaded, though: going from nothing to one month is the single biggest improvement, because it stops ordinary emergencies turning into credit card balances.
It belongs somewhere safe, separate and reachable within a day or two — never invested, because it exists for exactly the moments when markets are also falling.
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