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Your essential guide to building an emergency fund

18 October 2019

Sudden loss of job, a broken-down car, a loved one coming down with an unexpected health issue – these can happen to any of us at any time, causing major financial stress.

Suddenly, you’re out of pocket, anxious and scrambling to find the funds to get your life back on track. If that sounds familiar, you’re not alone: research shows that one in three of us are spending beyond our means and wouldn’t be able to come up with $500 in the event of an emergency.

Which is exactly why an emergency fund is so important. Savings give you peace of mind, the freedom to make financial decisions and the power to handle whatever life throws at you. (Our tips and templates on financial planning or saving for a rainy day can be downloaded here: money toolkit.)

What is an emergency fund?

An emergency fund is essentially a savings safety net: money that you’ve stashed away for a ‘rainy day’. You commit to building it by putting money aside regularly (ideally in an account you can access) and not touching it – unless there’s a crisis.

Having this buffer enables you to access your own personal funds when they’re needed without having to max out your credit card, borrow money off friends or family, or get into debt by taking out a loan.

Do you need an emergency fund?

Emergency funds are important for most people, but even more so for women. Thanks to the gender pay gap, we statistically earn less than men, so having that buffer is important.

Similarly, if you’re a single parent, if you work for yourself, or if you live in a property that needs constant repairs, a savings buffer is essential. A rainy-day fund is also key for women who may have suffered financial or other abuse – although if you’re in this situation, it pays to be careful and seek advice for establishing an emergency fund safely.

How much should be in your emergency fund?

Everyone has different needs, income and expenses. For some people, putting aside $10 a week into an emergency fund may be all they can afford – and that’s fine! For others, the goal may be having a month’s worth of expenses tucked away. Or maybe a year of expenses might be the absolute minimum you’re comfortable with.

Some experts suggest saving at least three months’ worth of expenses in your fund. To work out how much your expenses are, add up everything you spend per month including rent or mortgage payments, food, bills and other costs. Don’t forget to factor in the little expenses too, like lunches at work or daily coffees. It all adds up!

Let’s says for example, once you add up all your monthly expenses, you need roughly $4500 per month then your goal may be to save a buffer of $13,500, which gives you three months’ worth of expenses in a crisis. Tools like Westpac’s Savings Calculator can help you work out how long it’ll take to reach your goal.

5 ways to boost your emergency fund

There are lots of ways to start building (or boosting) your emergency fund. Here are some strategies that you may want to consider.

 1.     Slash expenses and save the extra: Paying for a full on-demand TV package? Compare providers, their packages and what you watch and need. If you swap your subscription and end up saving about $100 per month – that’s $1200 per year for your emergency fund.

2.     Save into an account paying higher interest: You may wish to ask your bank to send a regular payment to the account or ask payroll to send a portion of your pay to that account. Try to choose an account that offers bonus interest if you don’t withdraw money.

3.     Create your emergency fund in an offset account: You could use your home loan’s offset account as your emergency fund if you feel that is a better option for you. Or, if you have a redraw facility, add more to your mortgage repayments to create funds that sit in your mortgage but are there to dip into in an emergency.

4.     Top your account up with any extra: If you’re in the habit of cleaning out your wallet or bag and dumping excess change into a jar at home, wait until it’s full then take it to your bank and pop it into your emergency fund. Similarly, you could transfer your tax rebate into your fund or even sell stuff you no longer want to boost your fund further.

5.     If you can find the time: Why not get a side-hustle and save what you earn into your emergency fund? It could be an Uber or Air tasker style of gig or AirBnB. Maybe you have some skills you’re not utilising that could earn you money.

When should you use it?

Having a large chunk of change in an account may be tempting for many of us – but this isn’t money you can use for something you want (like a new outfit or a trip to Fiji). It’s only there to cover the cost of real emergencies.

As a rule of thumb, you may define ‘emergencies’ as things you absolutely cannot get out of dealing with right now, such as:

  • Repairs to your car or needing to replace household appliances.
  • Home maintenance that’s not covered by insurance.
  • Unexpected travel to see a sick loved one.
  • Job loss for you or your partner, or a slow patch when you need to cover bills and the mortgage (if you work for yourself).
  • Leaving a toxic job
  • Escaping an unsafe family home environment.

In the end

If you’re keen to save more or establish an emergency fund, talking to a financial expert is a good idea. Start – it doesn’t matter how small. Saving a little bit each week can bring you peace of mind if something goes awry.

Go to our money toolkit for more tips and templates on financial planning.

The information above is general in nature. Always seek professional assistance to ensure that your decisions are appropriate to your personal circumstances and objectives.