Start saving for an emergency fund
Planning for an emergency might not sound like an ideal way of spending a Saturday night. But, as the COVID-19 pandemic taught us, no one is immune from a sudden, unexpected financial upheaval. That’s why everyone needs an emergency fund.
What’s an emergency fund?
An emergency fund is a lump sum you keep squirrelled away, in case an emergency happens.
A financial emergency is anything that suddenly prevents you from earning money or causes you to need more money, such as an accident, illness, job loss, flood or fire.
How much should you put in an emergency fund?
An emergency fund should enable you to survive for as long as the emergency affects your finances. It’s impossible to plan for every event, but, as a rule of thumb, three months’ worth of living expenses is a good start. Calculate how much you’d need to live, including all essentials, such as mortgage repayments or rent, food and bills. Use a budget spreadsheet to work out your monthly expenses, then multiply this by the number of months you would like to cover.
If you're thinking long term, it's worth having a bit more put aside. This can help if you're unable to work for a while — for example, if you take some time off work to care for a family member. You should also think about how income protection can help cover costs if you're unable to work due to illness or injury for a longer period of time.
Tips for building your emergency fund
The first step is to open a separate account—preferably one with a high interest rate, which you can’t access with a debit card. A separate account will mean you're less tempted to dip into it for everyday expenses.
If you have a home loan with an offset account, you can use the offset account as your emergency fund. This will lower your home loan interest payments, and means you can access your money quickly.
Next, set up an automatic transfer to your emergency fund from the account that your wage is paid into. You can then set and forget, knowing your emergency fund is growing.
Keep adding to your emergency fund
Whenever you get a little windfall, put at least some of it away. If you get some extra money during the year, like a tax refund, you can use this to boost your emergency savings.
Look for ways to boost the budget and cut expenses
In addition to funnelling your extra cash into your savings fund, cutting back on luxuries and unnecessary expenses can make a world of difference.
Consider cutting back on your expenses; here are a few to get you started:
Eat home cooked meals, more often. A budget will often open your eyes to how much you spend eating out and eating in e.g. Uber eats.
Make a shopping a list and take it with you when you hit the grocery store. Having a list will help you stay focused on what you need, so you won’t be tempted to fill your cart and spend extra money.
Ask your credit card provider if you can get a reduced interest rate. Whatever money you save on interest charges you can put towards your emergency fund.
Review your contracts and memberships. Do you have a gym membership but hardly use it? Are you paying for premium cable, which you never watch? If so, consider cutting them back or getting rid of them!
Consider getting your takeaway coffee twice or thrice a week instead of everyday. I know..this one hurts us to even write.
Individually these small cuts may not seem like a lot, but added together they will make a significant difference in the long run. The more you can regularly save, the better. If you put $20 a week into a savings account, you'll have over $1,040 by the end of the year. That's the start of a good amount of savings to give you some financial breathing space.
When to use your emergency fund
Keep your emergency fund for expenses you need to pay quickly when other money isn't available. If it can wait, save up for a few weeks and pay it from this saved money instead.
Avoid the temptation
Getting an emergency fund off the ground might not sound easy, but it’s worth it for peace of mind.
Once you have three months’ worth of survival expenses in your account, you’ll no longer have to panic at the thought of losing your job or facing an unexpected event. When you’re under stress, the last thing you should have to worry about is money.
If you need to dip into your emergency fund, remember to top it up again afterwards.
To learn more about a budget and cashflow system that works, read our post about the Bucket budgeting strategy.