Lesson 2 of 10
Emergency reserves and liquidity
A reserve is money set aside for an unexpected expense; access is part of its purpose.
The idea
An emergency reserve covers unplanned costs or an interruption in income. Its useful size depends on the person’s expenses, income stability, and other resources. There is no single dollar target that fits everyone.
Liquidity describes how readily an asset can be converted into spendable money. Compare not just the account balance, but access delays, withdrawal restrictions, and possible changes in value. Keep planned expenses separate from emergencies.
Worked example
Illustration: A person models $1,800 of essential monthly spending and chooses to explore a three-month reserve scenario. The scenario target is $5,400. With $2,400 already saved, the gap is $3,000. Saving $250 monthly would close that gap in 12 months, assuming no withdrawals or interest. Three months is an example input, not a recommendation.
| Input | Example |
|---|---|
| Essential spending | $1,800/month |
| Scenario duration | 3 months |
| Scenario target | $5,400 |
| Current reserve | $2,400 |
| Remaining gap | $3,000 |
A common mistake
Treating money committed to next month’s rent as an emergency reserve as well.
Try it yourself
Model $2,000 in essential spending for two months. Starting reserves are $1,000 and monthly additions are $300. How long does the $3,000 gap take to close?
Show the worked answer
10 months, with no interest, withdrawals, or changes in spending.