A cash reserve is often described as money for emergencies, which is vague enough to be unhelpful. Its function is preventing forced borrowing and forced selling.
The cost avoided is the point
Without accessible cash, an unexpected cost must be met by borrowing at short notice or by selling an asset at whatever price is available.
Short-notice borrowing is expensive precisely because it is urgent, and selling under time pressure removes any ability to wait for a better price.
The buffer is therefore buying the option to choose the timing, which is where its value comes from rather than from the interest it earns.
Income volatility drives the size
A household with stable employment and predictable costs faces a narrower range of shortfalls than one with variable or seasonal income.
Single-income households carry more concentrated risk than those with two independent incomes, because one interruption removes everything rather than part.
General rules expressed in months of expenditure are a starting point, but the appropriate figure depends on how variable income actually is and how quickly it could be replaced.
Accessibility is a requirement, not a preference
A reserve that cannot be reached within days does not perform the function, regardless of the return it earns. Notice periods and settlement times matter more than rate.
Assets that fluctuate in value are unsuitable for the same reason, since the moment the reserve is needed may coincide with a period of weakness.
This is why the buffer is held in cash despite the return being lower than alternatives. The lower return is the cost of the option.
Credit is not a substitute
An unused credit line looks like a reserve but depends on the lender's continued willingness to lend, which can change exactly when circumstances deteriorate.
Limits can be reduced or withdrawn, and eligibility for new borrowing typically worsens during the events the buffer is meant to cover.
Credit is a useful supplement to a cash reserve and a poor replacement for one.
Separating it from predictable costs
Reserves drained by annual insurance premiums or vehicle servicing are not available for genuine shocks, and those costs are predictable enough to be budgeted separately.
Keeping the buffer distinct from the accounts holding annualised costs keeps its purpose clear and its target easier to set.
Once it is doing only one job, the question of how large it should be becomes answerable from the specific risks it covers.