Excerpts from this post are featured in this ABC News article. The following is the full version by Pursue Wealth’s Associate Advisor, Alex Strempel:
1. What is an emergency fund?
An emergency fund is a savings buffer specifically set aside to cover unexpected expenses or financial emergencies. It acts as a financial safety net, providing peace of mind by alleviating stress. This ensures you don’t have to rely on high-interest debt, such as a credit card or need to liquidate investments in times of crisis, which may impair other financial or lifestyle goals.
2. How much should you have in an emergency fund?
This figure comes down a person’s comfortability to ensure they feel confident with the amount they are keeping aside. This confidence allows people to allocate other funds towards different goals and priorities by ensuring they still have their financial safety net in place.
An emergency fund forms one of your ‘buckets’ in your overall cashflow structure and ideally sits at a months’ worth of net household income at minimum, as well as a months’ worth of expenses in a purpose-built spending account. This amount can vary based on individual circumstances such as job stability, consistency of income, dependents, and other financial obligations, such as an investment property. These can lead a higher level of emergency funds to meet ones needs and preferences, potentially upwards of 3 months of net income, household expenses & investment property costs.
3. Addressing concerns about saving three to six months’ worth:
Budgeting:
A powerful exercise to assist is to sit down and analyse top to bottom your income and expenses to provide awareness of current spending habits. Although it may feel overwhelming, it does provide flexibility if you are honest with yourself during the exercise. This is because you know how much you require to fulfil your lifestyle and any surplus can be directed to building your savings buffer. If there’s a deficit, you can work through priorities to cut back on areas of overspend to reduce the financial stress of not having an emergency.
Goal setting:
Having a goal that is set which is measurable with a specific time frame and dollar figure attached significantly increases your chance of achieving the goal, by upwards of 40%. Writing this down or utilising savings goals with banking apps serves as a great way to track your progress towards the goal.
Consistency:
Being consistent with the funds being put aside on a weekly, fortnightly or monthly basis (ideally in line with your pay) can empower you to achieve the goal and celebrate the progress along the way.
Positivity:
Life does get in the way and sometimes you can’t out as much towards the goal as you ideally want to. Its important to not get disheartened in these times, but rather focus on getting back on track with your savings goal.
4. Where’s the best place to put your emergency fund?
The best place for your emergency fund is somewhere easily accessible and low-risk. This can also depend on if you have an associated home loan or not.
For non-homeowners
High-yield savings accounts: These offer higher interest rates than traditional savings accounts while keeping your money liquid. Some offer bonus interest rates for meeting specific requirements such as regular deposits or growing the balance and some off higher standard interest rates for having the funds held in that specific account. It’s important to consider the terms, conditions and fees for bonus accounts to ensure you are able to meet the requirement, as an inability to meet then generally leads to a very low standard interest rate.
For homeowners
Offset accounts: Using an offset account links savings to a mortgage or loan, reducing interest paid on the loan by the balance held in the account. This means you are paying less interest on each loan repayment whilst having the funds readily available.
5. Is setting up automatic transfers a good idea?
Yes, automatic transfers are highly recommended. They make saving easier by transferring a set amount from your checking to your savings account regularly (e.g., monthly or bi-weekly). This ensures consistency and helps you build your emergency fund gradually without having to remember to save manually. Lining these automated transfers up with your pay can be a tactic to assist with the management of adequately allocated the money coming in from work. This is where an honest banking structure in place can promote automation and flexibility for your cashflow.
6. What about for people who have no spare cash to put away?
If you’re struggling to find spare cash to start building an emergency fund, consider these ideas:
Budget adjustments: Review your budget and prioritize saving even small amounts each week, or reducing expenses where possible. This can be reviewing insurances, consolidating streaming platforms or reducing takeaway, to name a few.
Side-hustles or increasing income: Some people may be able to turn their hobbies into income generating work on the side. This can be through taking up freelance work, sell crafts online, or offer services like tutoring or handyman work.
Sell unwanted items: Declutter your home and sell items you no longer need or use. Facebook Marketplace, Facebook groups or Gumtree are some options to clearing out unwanted or unused goods.
