The simple steps to creating and maintaining an emergency fund

Jun 06, 2020
A substantial financial safety net is one of the most important things to have on hand. Source: Getty.

It’s pretty hard to prepare for an economic crash no one saw coming. But those who lived through the GFC and Australia’s last recession 29 years ago would have learned that there’s nothing more important to have in your back pocket than an emergency fund.

Any unexpected event, from a natural disaster to injury, illness or shock global pandemic (as we now know all too well) can take a major toll on your funds, whether your losses are incurred on the stockmarket or through diminishing dividends, from the loss of employment or the destruction of belongings.

But how much you’ll need in your financial safety net can depend on a number of variables. If you felt unprepared for financial impact of Covid-19 or just want to ensure younger loved ones understand the importance of having a financial back-up plan, these guidelines could help.

How much should I have in an emergency fund?

As a general rule for emergency funds, of course the more money you have, the better. But a good target that many people follow is to save up enough to cover three months’ worth of expenses. Others, though, such as financial guru Noel Whittaker, say you could aim for as much as three years’ worth of coverage if you can manage it. It’s worth noting that having such a sum may have prevented some of the emergency $10,000 withdrawals currently being made from superannuation by many Australians.

The amount may not be dependant only on your personal monthly budget, though, and what you can realistically afford to put aside after living expenses are covered. (The government’s Moneysmart website has a simple budget calculator that can help you work out what your expenses really are if you’re not already in the habit of keeping track of them.)

For instance, if you’re the main or only breadwinner in your family, then you’ll need to have extra funds to fund your family’s needs or the potential loss of your partner’s income. Meanwhile, if you have a job in a seasonal or unstable industry or a suffer from a serious health issue, it’s wise to put aside extra funds to cover you if you’re unable to work for long periods.

How do I save for an emergency fund?

Emergency funds should always be completely separate from your actual savings, so the first step would be to open up a new bank account. As it hopefully won’t be touched for while, try finding a bank with a higher interest rate so your savings keep growing even when you’re not actively contributing.

Setting up an automatic transfer from your everyday account to your emergency fund account, which happens on the day income enters your account, can help you stick to your savings goal if you’re one of those people who’re tempted to splurge as soon as they have some cash!

However, make sure the bank you choose is a flexible one as these funds usually need to be accessed at the last minute. Check that there are no withdrawal fees attached to the account and make sure you’re not locked into a fixed term in order to receive your interest payment.

If you already have a decent amount of savings, try depositing a chunk into the emergency fund account as a jumping-off point. Or if you’re building from the ground up, set up an automatic transfer of about $20 a week. Even without any additional interest, you would have $1,040 by the end of the year.

If you know someone who needs inspiration to get saving, Moneysmart’s savings projection calculator shows how putting aside even a little can seriously add up over time.

If you have a home loan with an offset account, you can use it as your emergency fund too, giving you double bang for your buck because it’ll not only lower your home loan interest payments but you can quickly access the money whenever you need.

When should I use my emergency fund?

“Emergency” is a fairly broad term, but think of your emergency fund as a last resort. This means you should only be dipping into this cash if you need to pay up immediately and you have no other money available.

Don’t think of it as savings, but as your safety net that when there’s no other viable options. And if you do end up dipping into your emergency fund, remember to top it up again when a steady income returns.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.

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Do you have an emergency fund? Have you ever dipped into it?

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