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Financial emergencies: How much should I have in my emergency fund?
25 March 2021
The biggest problems often arise when we least expect them. And after a year of disruption due to COVID-19, many of us are trying to ensure 2021 runs more smoothly.
While you can’t always avoid life’s challenges, you can take steps to protect yourself against them financially. Building up a ‘buffer’ or emergency fund could be the solution that helps you ride out unexpected financial emergencies. Here’s how to prepare by saving and finding help when you need it.
How to prepare yourself for financial emergencies
The best way to overcome financial emergencies is to be prepared with savings. While that will take a different path for each of us, depending on individual circumstances and current ability to put aside some savings, the best time to get started is right now.
A good rule of thumb is to have enough in your emergency fund to cover at least three months of expenses. If you have a family with regular costs like school and sports fees, then you may want to expand that to six or even 12 months of savings.
Let’s say your emergency fund needs to be around the $10,000 mark. That sounds like a lot of money – maybe you think an impossible figure to attain. But when broken down, you can hit that goal within a year with strict savings habits. Putting aside $28 each day for a full year will result in $10,220 in savings.
That timeline may not be attainable for everyone but remember that it’s not a race. As long as you get started and stick to your goals, you’ll watch that emergency fund slowly grow – and at the same time reduce your worries should a financial disaster strike.
Your emergency fund
The COVID-19 pandemic caused widespread disruption right around the world – not only on our healthcare system. Some of us, especially younger workers and women, have been hit harder - widening the inequality gap - while certain industries like travel and retail have been disproportionately affected. (Targeted support for women by the federal government to help get them back into the workforce is available.)
Australia has managed the crisis relatively effectively, and most of us are now able to live comfortably in the ‘new normal’ until the vaccine finishes rolling out. For some, the working from home and not socialising as often as they used to has meant they’ve saved more – but we all know or are aware that hasn’t been the case for everyone.
Recent figures show that only 37% of Australians would be able to rely on an emergency fund in the event they suddenly became unemployed or unable to work. That means almost two-thirds of the country would be in dire financial straits if the worst were to happen.
There are some simple steps to get started on building your emergency fund:
- Set yourself a savings goal and time frame in which you’ll do it;
- Work out how much you need to set aside each week in the time frame to meet the goal;
- Build specific savings into your budget by reducing debt - less debt means more money for saving;
- Identify where you spend money, so you can trim the fat in those expenses - or cut them right out;
- Consider keeping your emergency fund somewhere you can’t touch it easily, so you’re not tempted to dip into it;
- Stay committed to making regular payments by celebrating milestone achievements.
- Financial emergencies come in all shapes and sizes
It’s not just a global pandemic that can put us in a financial bind. Natural disasters – bushfires, floods or otherwise – can also turn your normal everyday life on its head. Would you be able to manage financially if your house became uninhabitable? Do you have enough insurance to protect yourself and your loved ones against such an unpredictable challenge?
Emergency funds may also need to be deployed if your car needs major repairs or you’re hit with a dental emergency.
Think about what would happen if you, your partner or a close family member became so ill they couldn’t work. What if you or they lost their job and couldn’t find another job for at least three months? Would you be able to contribute enough financially to maintain the life you’ve worked so hard to build?
An option to consider is to invest in income protection insurance. This insurance pays part of your income if you’re unable to work due to partial or total disability. It does not cover you if you are stood down or become unemployed.
Asking for help when you need it
Financial emergencies can be a great leveler. High-earning individuals unexpectedly struck down by disaster could quickly find themselves struggling to make their mortgage repayments. Others, who’ve taken the time to build an emergency fund may find themselves coping more easily in the same situation.
The bottom line? Always ask for help when you need it. There’s a reason our Federal and State governments offer assistance programs – because they understand that sometimes life is tough, but the bills still have to be paid.
It’s important to remember that utility companies and banks want to work with you to solve your issues where they can. Talk to them about your options and what you can do together. There are also ways to budget to help recover from financial setbacks.
Financial support is also available through various charitable organisations, the National Debt Helpline, financial providers, such as Westpac, and even women-specific support services to help you meet the challenges.
Building an emergency fund starts by putting aside a small amount every time you can. By being consistent, proactive and embracing the support of like-minded women through Ruby Connection, you can plan for the future.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.