Emergency Fund & Cash Drag

A common guideline is three to six months of essential living expenses, held somewhere safe and accessible. Lean toward the higher end if your income is variable, you are the sole earner, or your job would be hard to replace quickly; you can sit nearer the lower end if your income is very stable and you have other backstops. The right figure is personal, which is why this tool sizes it from your own essential monthly costs.

Cash drag is the opportunity cost of holding money in cash rather than investing it. Cash is safe and instantly available, but over time it tends to lose value to inflation and earns less than long-term investments might. The calculator weighs this cost against the security an emergency fund provides, so you can find a balance that protects you without leaving far more idle than you need.

Keep it somewhere safe, separate from daily spending, and available within a day or two - a high-yield savings account is the typical choice. The goal is certainty and access, not growth, so it should not be exposed to market volatility where its value could fall exactly when you need it. Earning some interest is a bonus, but never at the expense of being able to reach the money immediately.

A common sequence is to build a small starter fund first, then aggressively clear high-interest debt, and only then top the fund up to its full size. This gives you a buffer against minor emergencies so a surprise expense does not push you back onto the credit card, while still prioritising the expensive debt that costs you the most. Your exact order depends on how large and costly your debts are.