Money Path

Build your runway before you invest a dollar

Three to six months of expenses in plain cash sounds dull. It is the thing that lets every other part of your plan survive a bad year.

Most money advice starts with investing because investing is the exciting part. We start with cash, because cash is what stops a lost job, a broken transmission or a surprise bill from turning into a credit card balance at 25 percent.

We call it your runway: the money you will need within the next three years, kept where it cannot fall in value.

How much is enough

Count your essential monthly spending: housing, food, insurance, transport, minimum debt payments. Leave out the things you would cut in a crisis. Then pick a target:

• Three months if your income is steady, you have two earners or you could find similar work quickly.
• Six months if you are the only earner, self employed, paid on commission or in a narrow field.
• Twelve months if you are close to retirement or your work is seasonal.

On top of that, add anything you already know you will spend within three years: a down payment, a car, a wedding, tuition. That money is runway too, not investment money.

Where to keep it

Runway has one job, to be there when you need it. That means:

• A high yield savings account at an FDIC insured bank, or a credit union insured by the NCUA. Deposits are insured up to $250,000 per depositor, per bank, per ownership category.
• Treasury bills or a money market fund for larger amounts, if you are comfortable with a brokerage account.
• Not stocks. A fund that can drop 30 percent in a year is the wrong place for money you may need next month.

The rate matters less than the safety, but do shop around: the gap between a big bank's ordinary savings account and an online high yield account is often several percentage points. US review

Build it in stages

You do not need six months saved before you do anything else. A sensible order:

1. Save one month of expenses. This alone ends most small emergencies.
2. Capture any employer match in your 401(k); see the match is the best return you will ever get.
3. Pay off expensive debt; see avalanche or snowball.
4. Grow runway to your full target.
5. Invest the rest for the long term.

That is the start of the Money Path. Check where you stand with the runway calculator.

When you use it

Spending your runway is not failure. It is the plan working. Refill it before you go back to investing extra, and you will never be forced to sell investments at the bottom of a market.