Be prepared for financial emergencies

Sometimes in life we experience financial surprises that are beyond our control. Sometimes our car or laptop will break down unexpectedly or you may have an unexpectedly large winter heating bill. Building an emergency fund may be the best way to ensure you have enough cash to account for any shock costs.

Disclaimer: The information contained in this article is of a general nature only and should not be taken as financial or legal advice on any of the topics discussed. Always consult a financial adviser before making any investment decisions.

What is an emergency fund?

Simply put, an emergency fund is a financial buffer account where money is specifically set aside for unexpected expenses.

Saving a pool of money for your emergency fund will mean you are well prepared for worst-case scenarios, and you won’t have to rely on credit cards or personal loans to cover unexpected or urgent costs. After all, you don’t want risk eating into your hard-earned savings, particularly if you have financial goals, such as saving for a home deposit.

How much should I save?

The right amount you should save for your emergency fund will depend on your personal financial circumstances, but it should cover the basics such as rent or mortgage payments, utilities, groceries and daily travel. It should also enable you to meet personal loans, credit card repayments or any other financial obligations you may have.

According to Mozo, an emergency fund should have enough money to cover your bills, financial commitments and day-to-day living costs for three months.

Depending on where you live in Australia, you’ll need between $7,000 and $10,000 for a solid three-month safety net. If three months’ worth of expenses feels too high for you based on your current income, you could start with a smaller goal, such as $3,000 in order to build some momentum.

Tips to help you build your emergency fund

The emergency fund you’re building should act as a safety net in times of crisis, but the building of it shouldn’t be difficult. Here are a few tips to help you build your emergency fund with ease:

1. Start with a goal in mind

Your starting point should be to work out how much you want in your emergency fund. The next step is to divide your goal by the amount of weeks or months within your ideal timeframe. The calculation of this sum will be your goal: the monthly or weekly amount you need to budget for.

2. Set a budget

Creating a budget is vital to kicking your personal saving goals. You could use our quick and easy budget calculator tool to work out how realistic your financial goal is in a matter of minutes!

If you’re finding that you don’t have enough disposable income to action your savings plan, it may be worth looking at ways you can find extra cash or make some changes to your spending habits to cut back your expenses.

3. Separate the fund from your everyday expenses

A critical component of this plan is to set up a separate, dedicated account for your emergency fund. An emergency can strike us at any time, so having the ability to quickly access your funds crucial. Creating a savings account that is separate from the bank account you use on a daily basis will mean that you’re not tempted to dip into your reserves.

You could organise an automatic transfer, so that a transaction is made as soon as your pay is deposited in. This way you won’t have to think about your emergency fund, even though it is accessible when you need it.

Another option, if you have a home loan with an offset account, is to use this for your emergency fund. You will be reducing the interest you pay on your loan principal by depositing this extra money in, and still have access to your emergency fund when you need it.

4. Work out some solid guidelines

It pays to be prepared, so it is important that you set some ground rules around what you can use your emergency fund for.

Asking yourself the following questions will help with the creation of these guidelines:

• Is the payment Unexpected – Have you known about the debt for some time, or has it come out of nowhere?
• Is the payment Urgent – Does it have to be sorted within your current pay cycle, or do you have enough time to set aside the money you need?
• Is the payment Necessary – Do you absolutely need to dip into your emergency fund, or can you take care of the payment with your current income? An alternative to dipping into your own savings is our award winning low-rate credit card, with its low introductory rate that can help you manage small payments for everyday use such as shopping and small unexpected expenses. With our credit card, you can also hold some of your total limit aside for unexpected emergencies.

5. Make sure your goals are realistic

Your emergency fund needs to support your overall financial plan. We may fall into the trap of thinking “the bigger the emergency fund the better” but you may be crossing a line where your fund-building goals are overstepping your savings goals.

So the key is to work out what is realistic and then set small milestones that are achievable for you to reach each month.

By breaking down your goals into monthly or quarterly targets you will be keeping the balance and building motivation at the same time.

Expect the unexpected

Everyone needs to save money for the unexpected. Having funds in reserve will make a huge difference between having a certain level of control over your situation and going into debt. An emergency fund will help take the weight from your shoulders and help you to relax more.