What is an emergency fund?
An emergency fund is a financial safety net, offering you instant access to money when you need to cover the cost of unplanned expenses, like losing a job, unexpected travel or a medical emergency. This involves putting funds aside periodically so you can dip into this cash reserve without needing to resort to high-interest loans or credit cards and get into debt or financial hardship. But how much should you have in emergency savings? There are no hard and fast rules, and you should consider your circumstances. The general guide is to save two to three months’ worth of living expenses. But, if you’re thinking long term, like time off work to care for family, it’s worth considering emergency savings of up to six months.
How to build an emergency fund
Your emergency fund needs to be separate from your everyday spending to ensure it’s available when you need it. Here are a few ways to create and maintain one.
Set a savings goal
To set a savings goal, work out what your living expenses are each month and then multiply that by the number of months you want your emergency fund to cover. When working out your living expenses, make sure to include:
- rent or home loan repayments
- groceries
- transport costs, like petrol or public transport fares
- loan and credit card repayments
- bills like electricity, gas, internet and phone.
A budget planner can help you create a monthly budget. If you’re not sure exactly where your money’s going each month, you can track your spending by using a budget app.
Open an account and start saving
Your emergency fund should be for emergencies only. Ideally, you want it to be separate from your other accounts, so you’re not tempted to dip into it.
Consider opening a separate savings account just for your emergency fund. Look for an account with a good interest rate so you can earn a bit extra each month on your savings. This is part of a wider strategy on bucketing your money that can help you save for different goals and needs.
Automate your savings
Now that you’ve set up an account, it’s time to start making regular deposits. Consider setting up a regular deposit so money is automatically transferred to your savings account every time you get paid.
Maximise your offset account
If you have a home loan, consider using an offset account as your emergency fund. That way the money in your emergency savings will also lower the amount of interest you pay on your home loan, while still allowing you to access the money quickly if you need it.
Continuously contribute to your emergency fund
Whenever you find yourself with some extra cash, like a tax refund, consider using it to boost your emergency savings.
Use your emergency fund for emergencies only
Remember, your emergency fund should only be used in an actual emergency. It might be worth setting some rules for yourself around what counts as an emergency to you.
If you think you’ll be tempted to use it for non-emergencies, consider making the money a little harder to access. One option is to hide your emergency fund from view in online banking. This way you won’t see the balance when you log in and you’ll be less tempted to spend the money.
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/manage-money/budget-saving/emergency-fund
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
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