Do You Really Need 6 Months in Cash?

You know the emergency fund rule: three to six months of essential expenses, more if your income is unpredictable or could take longer to replace.

That's useful guidance. But a better question is:

If your income changed tomorrow, how long could you keep your household running without touching your long-term investments?

Cash became more appealing after the Fed started raising rates in 2022. For a while, money market funds were paying around 5%, and The Wall Street Journal reported this week that Americans still hold more than $3 trillion in retail money-market funds, near record highs.

If you've gotten comfortable holding more cash, this is a good time to ask whether you still need all of it there.

This week:

The three-to-six-month guideline generally refers to essential expenses, not everything you're spending today.

For me, the non-negotiables are mortgage, insurance, healthcare, food and required payments. Everything else is where I start looking for room.

In my house, multiple gym memberships went and the DoorDash deliveries stopped. Your list will have both: the expenses that need to keep getting paid and the things you'd cut first. The things that became normal when life was going well are usually the first places you look when income changes.

Even some bigger expenses may have more flexibility than you realize. A college may offer a payment plan. A healthcare provider may let you spread a bill out. You still owe the money, but you do not have to pay it all at once.

Next, subtract any income that would continue, such as a partner's income, rental income or consulting income. For example, if your essential expenses are $10,000 a month and $6,000 would still come in, your gap is $4,000 a month, or $24,000 for six months.

That's the gap to plan around.

Once you know the gap you need to cover, the next question is where that money would come from.

Layer 1: Available now
Checking, high-yield savings and money market funds.

Layer 2: Available soon
CDs, Treasury bills and other short-term holdings that mature over the coming months. As they come due, they become another source for covering your gap.

Layer 3: Backups

This could include a HELOC, a 401(k) loan or one of the 0% promotional credit offers that seem to be everywhere right now.

A HELOC is usually better to set up before you need it, when your income and finances are stable. It's still debt, usually at a variable rate, so I wouldn't treat it like savings. Check what it costs to open and keep available, even if you never use it.

The 0% offers work differently. Some let you access tens of thousands of dollars at 0% APR for 9, 15 or 18 months in exchange for an upfront transfer fee, often around 4% or 5%. That can be cheaper than carrying a regular credit card balance, as long as you know when the promotional period ends and have a plan to pay it off before the regular rate kicks in.

I wouldn't count borrowing as part of your emergency fund. But it helps to know what you could access if you needed another option.

If you're running these numbers for the first time because a job ended, a marriage changed, or the person who used to handle the finances isn't there to ask anymore, start with what you know today: what your household needs, what income is still coming in and what you could access. The rest of the picture can come later.

Then ask:

How far through these layers would you have to go before touching your long-term investments?

You may run the numbers and find that $24,000 covers six months of your actual gap. But maybe $40,000 or $50,000 feels better.

Maybe you're thinking about a slower hiring market, a layoff you've already lived through, parents or kids you're helping, or waiting for the right next job.

That's your sleep-at-night number.

The next question is whether all of it needs to sit in cash to do its job.

If $24,000 covers your immediate runway and you also have CDs or Treasuries coming due, plus other backups, you may already have more cushion than your savings balance suggests.

You can still hold more cash. Maybe that extra cushion buys you more time to find the right job or simply helps you sleep better.

Cash has been easy to justify while yields were high, but those yields change. If your cash earns less than inflation, your purchasing power is slipping even if the balance isn't.

Write down four numbers:

Essential monthly expenses: $_____
Income that would continue: $_____
Monthly gap: $_____
Money available now or soon: $_____

Your runway = money available now or soon ÷ monthly gap

For example, if your monthly gap is $4,000 and you have $32,000 available now or coming due soon, you have about 8 months of runway before you need to consider backup options or touch long-term investments.

Then ask:

How many months could you keep your household running before touching your long-term investments?

If that number gives you more runway than you expected, take another look at the cash you're holding and decide whether all of it still needs to be there.