The emergency fund, sized honestly

Everyone agrees you should have one. Nobody agrees how big it should be, because the honest answer is that it depends, and "it depends" does not fit in a headline. Here is what it depends on.

What it is for

An emergency fund covers the gap between an income stopping and a new one starting. It is not for a boiler, a car repair or a wedding. Those are expenses you can see coming, even if you do not know the date, and they belong in a separate pot with a name on it.

The three questions

1. How long would it take to replace your income? A nurse finds work in a fortnight. A specialist in a small field might take six months. Size the fund to your field, not to a rule.
2. How many incomes does the household have? Two salaries that are unlikely to stop in the same month need less cover than one.
3. What would you cut? Count the expenses that survive a bad month, not the ones you have now. Most households can drop a third of their spending within a week of needing to.

A worked example

A household spending 3,000 a month, of which 2,100 is hard to cut. One earner, in a field where a search takes about four months. The fund is 2,100 times four, so 8,400, with a little on top for the month you are hired but not yet paid. Call it 10,000. The "three months of expenses" rule would have said 9,000 and been about right by accident.

Where it lives

In an account you can reach in a day and would not touch on a whim. Not invested. The point of this money is that it is there, not that it grows.