Beyond the 6-Month Rule: Building Your Personal Minimum Runway (PMR)

PS. The information on our website is not financial advice, and you should not consider it to be financial advice. This site is for informational purposes only. 

Almost 70% of Americans lack 3 months of expenses saved. That's scary. But it's just the tip of the iceberg. Most people are living too close to the financial edge and consider it totally normal.

About eight years ago, I was feeling uneasy. On my morning walk, on the same trial, I walked hundreds of times, there is one instance that stands out to me so vividly. As I finished the quarter-mile loop, I said to myself, “Man, if I just made $10k/m, I would be so fulfilled, content, and at peace.”

At the time of my life, I was working a corporate job about 50-60 hours a week, making around $3k/m with $20k of debt… and I didn’t really feel much autonomy in my life. I hadn’t made money online and didn’t know if I’d ever get out of debt.

Dream Comes True

Fast-forward a few years, and $10k/m has become my average income, with some months being much higher, all while only working a few hours a week. Yet, I don’t feel fulfilled, content, and at peace like I thought.

Why?

I had paid off my debt, was making more money than my monthly bills, and had freedom of my time. Why was this not enough? I figured maybe it could go away anytime, so don’t get too comfortable. Fair enough, so it made me think about savings, which got me thinking about my personal runway (some call it a safety net, burn rate, or emergency fund).

A personal runway is the amount of time you spend in your future. Practically, some consider it as your savings minus your monthly expenses.

The average American barely owns their next 4 days. (56% of U.S. adults currently are unable to afford a $1000 emergency expense. And this is a 2024 report! (source)

That is 1 out of every 2 people.

That means: Half the people at your favorite mall are buying things on future time, while 7 out of 10 people don’t have 3 months of expenses saved.

And most of you probably already know everything I’ve mentioned thus far.

But this is a stepping stone of a much larger problem to solve. A problem which only basically takes you out of the red. I don’t just want to get out of the red, I want to be in the green.

The traditional advice, save 3-6 months of living expenses is also incomplete advice. Think about it: say you save 6 months of expenses and you want to buy a house. You actually need 6 months plus the down payment (and technically a bit more to match your new home payments to keep you at 6 months of living expense).

• Assuming: $5k/m living expenses before new home

• Down payment: $60k (with closing costs)

• New Living Expenses: $6k/m

• Total Needed: ($6k/m * 6 months) + $60k = $96k

And if you live in any major city, double those numbers.

There is a better way to think about all of this, that’s contextual to 2024 - it considers inflation, higher home prices, lifestyle goals, ease of relocation, investment opportunities, and more. Here is how I determine an accurate personal runway.

Become A Personal Angel Investor

To come up with the best runway goal, be your own Personal Angel Investor. You are only as capable as your potential leverage in any situation.

An angel investor would prioritize building savings, minimizing unnecessary expenses, and focusing on high-growth opportunities.

• Raise savings: How can you supercharge your savings rate? Many businesses fail because of savings problems.

• Lower expenses: Ruthless efficiency, focus on growth areas. Would an angel investor be confident in their investment, enough to give you more capital?

• Generate income: Find new ways to maximize earning potential while staying focused.

If you approach your life as a personal angel investor, depending on your cashflow:

• You wouldn’t buy the house, you would continue to rent it with the freedom to move anytime as you grow

• You wouldn’t buy your car outright, you would lease or get a loan. Why tie $50k into a car that could be used to generate income for your business?

You would think in terms of always being in the best possible position to put all your energy towards your most important opportunities in the market

The worst thing in life is to have a great idea, product, or business that you can’t fund.

Personal Freedom

Personal independence gives you margin in every area of your life. Not just in what you can buy - but in what you can do, pursue, earn, make, adjust, decide.

The more decisions you make from of a state of desperation, the poorer you become. - Douglas Krueger

Not sure how people put together a realistic number for their personal runway. Most people say 3-6 months, which I think is awesome. And I personally think that isn’t even close to enough.

Value Margin

The value of the right runway is that every year you can work to build another 2-3 years of time off to potentially start a company, travel, and gain knowledge. “Knowledge compounds on other knowledge” Balaji wrote and says it’s like angel investing in yourself.

Most people are living way to close to the edge. The comfort level people have with financial risk is mind blowing.

Which brings us to the idea of Margin of Safety. What is your margin of safety?

Shane Parrish in his book clear thinking defines a margin of safety as “A buffer between what you expect to happen and what could happen. It’s designed to save you when surprises are expensive.”

And that’s just it. Surprises are expensive. They aren’t based on your income for three months. That’s why we have insurance, and savings accounts. It’s not because we are fearful, but because we ought to be slow to over-extend ourselves.

A margin of safety is doubling down on the worst case. If losing your job takes 6 months to recover from, aim for 12 months of savings.

But there is one more piece to this I would add, especially as an entreprenuer, which has a higher consequence with failure.

For me, an emergency fund is the start but a persnal runway is the goal.

Personal Minimum Runway

Determine your personal minimum runway (PMR). Your PMR is the amount of money you need to feel secure and burn rate while you pursue your goals.

Your PMR: (Monthly Expenses) x (Number of Months You Want Covered) + (Major Financial Goals) = Your PMR

A safety net will include what you need not just for an emergency but also is contextual to your life position and where you are going. It sounds a little vague but the reality is, if financial success is the goal, money isn’t a hard science as much as a soft skill.

A proper PMR will consider cash reserves for emergencies, investment opportunities, and peace of mind.

For example, I’m 34 yo, not married, and self-employed. With that, my safety net needs to consider a few things: current life, my goals to get married, and my goals to own a home.

In other words, the question to ask: What number do I need in my bank to feel comfortable in life, currently? This is your Personal Minimum Runway.

My PMR is 24 months plus a down payment. I keep most of this cash in a high yield savings account (Betterment). This gives me full freedom before I sign a lease on an apartment to be know I can pay it, I’m not stressed on this months bills, I can say no to a big project, and can invest in things I want to see grow.

PMR is a substantially better way to think about your financial position as it considers everything.

Practically, I use Betterment to save. (more on Betterment here)

Rules for this: Robo-investor, low(er) management fees, easy access to index funds, high yeild savings is also nice, and no active debit card (you can get one, I just choose not to).

Let’s recap: How much time of your future do you own? Even if you earn well above six-figures, if you are cash poor, you are time poor. Turn your skills into income.

If you are completely new to this, this article is just the start of a health financial conversation. Consider these topics on how to raise your net worth:

• Budgeting and expense tracking to better understand spending habits

• Income sources and ways to increase earnings potential over time

• Types of savings and investment accounts (e.g. emergency fund, retirement, tax advantaged)

• Asset allocation and diversification principles for long-term passive investing

• Insurance needs (e.g. health, life, disability, property)