How To Build An Emergency Fund

How To Build An Emergency Fund

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What is an emergency fund?

An emergency fund is money you have set aside to help to pay for those unexpected expenses that life can throw at you. This can be medical bills, your car breaking down, job loss, a relationship break-down, or having to travel at short notice for a family emergency.

Whatever the reason, an emergency fund is a financial safety net for when things go wrong! By having immediate access to a stash of money, you can help yourself or your family when an unexpected situation arises, without resorting to expensive credit cards or personal loans.

How much do I need in an emergency fund?

This figure can differ from person to person, as it really does depend on individual needs, and whether you are paying off debt or are debt-free. You could want a set amount (say $2,000) or enough to cover a certain amount of time (say 3 months of basic living expenses). However, in the case of a medical emergency or job loss, it is best practice to have enough to cover the time it can take to return to work, which could take months.

The best way to work out your ‘number’ is to work out your basic living expenses for a month, including:

  • mortgage repayments or rent
  • food
  • utility and insurance bills
  • any debt repayments
  • any medical costs (i.e. medication)
  • children’s expenses, such as school fees or sports
  • transport costs

You can add in incidental or non-essential expenses, such as entertainment, holiday savings or alcohol if you wish, however this will increase the amount you need to save. As you list your monthly expenses, ask yourself if you will really need it in an emergency, or can you survive without it for a few months if needed?

Once you have your monthly number, multiple it by the number of months you would like to cover. This final amount is now your savings goal.

How do I build an emergency fund?

Scarily, 1 in 5 Australians don’t have any savings to fall back on in an emergency. So, how do you build an emergency fund from scratch in Australia?

1. Set up a high-interest savings account

Ideally you want to keep your emergency fund separate from your everyday accounts. This makes it easier to keep track of your savings progress, and prevent you from dipping into it for non-emergencies. Plus earning interest on your money as it sits in the account will help you to reach your goal sooner.

However if you have an offset account attached to your home loan, it can often be more cost-effective to keep your emergency savings there. This will lower the interest on your loan, and you can still quickly access your money in an emergency.

2. Automate your savings

Work out what you can save each week and automate it. Setting up a regular automatic transfer to your emergency fund account means you can ‘set and forget’ while your savings grow.

And please don’t worry if the amount you can save each time is small! Even if it is as small as $10 a week, every little bit you can save adds up. Being consistent and regular with your savings is what matters!

3. Add a little extra

Adding any extra amounts of money you receive throughout the year, such as a lump sum, tax return or pay rise can really speed up your savings.

If you aren’t expecting any extra money and really want boost your emergency fund right now, search for ways to make it! From completing online surveys to selling your unwanted items, there are a variety of ways to make extra money to add to your emergency fund.

When should I use my emergency fund?

While the definition of an emergency can differ between individual people and situations, it’s important to work out what an emergency is to you, to avoid dipping into your emergency fund for unimportant expenses. There’s no point saving for an emergency fund if you use the money to buy new clothes or to go on a holiday.

If you do need to access your emergency fund, don’t forget to top it up again afterwards. The last thing you want is to leave yourself short of cash when an urgent situation does arise!


Photo by John Torcasio on Unsplash


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