A broken heater in the middle of winter. A medical bill you weren’t expecting. Changes to your income. We all face unexpected curve balls at times – in fact, research shows the average Australian is hit with $1,900 in surprise costs each year.
But being faced with bills you hadn’t budgeted for can be immensely stressful – and a further 75% of Australians admit they wouldn’t have the savings to stay afloat if something were to happen to them or their family.
That's why an emergency fund is essential. Here’s what you need to know about starting your own.
What is an emergency fund?
An emergency fund is essentially a sum of money that you put aside for a rainy day. It’s a financial safety net you can dip into in times of crisis, rather than taking out a loan, using your credit card or having to borrow money from family and friends.
Although it takes a bit of discipline, it’s worth having some rules in place about when you can dip into your emergency fund (a holiday doesn’t cut the mustard, unfortunately).
It’s only for real emergencies, such as:
- Urgent repairs to your car or home
- Needing to replace household appliances
- Finding yourself without an income
- Escaping an unsafe home environment
- Travelling to see a sick relative.
Starting an emergency fund
It’s a good idea to create a dedicated account for your emergency fund to avoid dipping into it for everyday expenses.
You may not need to open a new account, either. For example, if you have a mortgage with an offset account, you could make that account your emergency fund, as any money you put into it lowers the interest you pay on your home loan.
Or, you may wish to opt for a savings account with a higher interest rate, so you can take advantage of compound interest as your money grows. Even better if the account is difficult to access or you have to transfer funds to another account in order to get your hands on your money.
How much should be in your emergency fund?
It’s entirely up to you. Many financial experts suggest aiming for 3-6 months’ worth of expenses, just in case you’re suddenly out of work and need to find a new job. But for some people, even $2,000 for an emergency fund might be all you can manage and enough to get you out of strife if an old appliance suddenly conks out.
Say you decide on a starting goal of $1,000. If you put $20 per week into a savings account, you could easily build just over that amount in a year – and from there, you'll have momentum to keep growing your emergency nest egg. Try MoneySmart’s savings calculator to set your own emergency fund goal.
7 ways to grow your emergency fund
Here are some easy ways to start boosting your emergency buffer.
1. Financial gifts. If someone gives you money for your birthday or Christmas, consider funnelling some or all of those funds straight into your emergency fund.
2. Tax rebates. Received a tidy sum from the Australian Tax Office (ATO)? Pop it into your emergency fund account before you can give in to any big impulse purchases.
3. Start a side hustle. If you have the skills to make some dollars on the side, consider funnelling that income straight into your emergency fund.
4. Sell stuff you no longer want. Declutter the garage and your household generally, and hold a garage sale or sell items online. Deposit all the proceeds into your fund.
5. Slash your expenses and save. Cancelling a gym membership or a streaming service you don’t use much can add up to hundreds of dollars per year – squirrel those funds away instead.
6. Set-and-forget your savings. Some financial institutions offer round-up facilities that round your transactions up to a particular dollar amount and send the extra into your nominated savings account. It’s an easy way to save without even noticing it!
7. Set up automatic payments. Scheduling direct debits to your nominated savings account means your fund will slowly build without you even noticing it.
Although it can take a while to build a solid emergency fund, committing to it and making regular deposits is worth it – just in case life does send you one of those unexpected curve balls!
If you ever need to dip into your emergency money, don’t forget to top it back up so you always have that peace of mind that the funds are there when you need them.