Emergencies are a part of today’s world, which is rapidly changing. Globally, this lesson was learned the hard way with the COVID-19 pandemic crisis, and hundreds of millions of people also realized they may not have been financially prepared. An emergency fund provides a financial safety net so you don’t have to borrow money if something happens to you or your family.
Australia has learned the importance of keeping an emergency fund on hand over the last 18 months. But how do you go about setting one up? What amount should you save up in case of an emergency? When you aren’t actively in need of the money, where should you keep it?
You can create an emergency fund by putting aside money to cover unforeseen (and often expensive) expenses. Occasionally, cars might breakdown, appliances may need replacing, medical problems may arise, and home repairs may be urgently needed. The modern world has a lot of financial potholes, and will continue to do so for many years to come.
The following guide provides advice on how to build a savings buffer that can withstand an emergency in the future:
Why do you need an emergency fund?
In the case of losing your job and not having sufficient savings to cover your expenses, the answer to your financial problems is clear: you’ll need an emergency fund to tide you over until you can secure a new job.
Buying groceries is one of the everyday expenses you’ll have to deal with as well as paying rent and utilities. Your car breaking down isn’t as severe, but it’ll still need fixing. Many people cannot easily pay $2,000 for a transmission repair job or similar issues, so an emergency fund can provide them with the cash they need quickly. As an added bonus, you’ll sleep better knowing you have a cash safety net in case of an emergency.
How much do you need to put aside?
A good starting point is $1,000 if you do not already have anything set aside. Once you have a few months’ worth of bare-bones expenses, you can start building from there. By that, we mean create a budget by adding up your fixed costs like mortgage, loans, car payment, utility bills, food – any essential expenses of daily life. A working monthly budget will help you determine how much money you need to cover bills on a regular basis.
Where’s the best place to keep an emergency fund?
It’s also not a good idea to bury it in the backyard or hide it under your mattress, as none of these methods will generate sustainable interest in a short period of time. Stocks, bonds, and mutual funds may not be recommended as emergency fund investments since they are designed for long-term growth and their values might change with market cycles and global instability.
Remember that an emergency fund should be treated as its own set of savings, separate from your regular bank accounts. When you deposit emergency funds into your regular checking account or other savings accounts, it’s far too easy to withdraw money for non-emergencies. This shouldn’t be available right away, otherwise you’ll be tempted to spend it.
Setting up a second, high-interest savings account for your emergency fund is an excellent idea. With a separate account, you’ll be less inclined to use it for day-to-day costs. Make a start, even if it’s only a small amount, and keep saving. The more you can save on a regular basis, the better.
If you deposit $20 into a savings account every week, you’ll have $1,040 at the end of the year. That’s the beginnings of a sizable savings account that will provide you some financial breathing room.
These quick steps will assist you in becoming in a position to begin saving for an emergency. You never know when one will strike, but you know it will sooner or later.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.