In an ideal world, we shouldn’t need to rely on our savings or growing home deposit to access money in an emergency. Here’s why backing yourself with an emergency fund is a strong (and smart) financial strategy.
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TLDR (Too long, didn’t read)
- Be budget savvy: Keep aside money to cover approx three months of expenses.
- Calculate your monthly spending, set a timeframe, and weigh up lifestyle changes.
- Maintain your good money habits and make adjustments where needed
Putting the ‘personal’ in personal finance
A well-planned emergency fund is one of the many golden tickets to buying yourself peace of mind and financial freedom. Who doesn’t want that weight off their mind?
Here’s the thing. Emergency funds really put the ‘personal’ in personal finance. And happily, there’s plenty of wriggle room to help you find a spot where you’re comfortable.
It’s the money you put aside for a rainy day for unexpected expenses, like when the car breaks down, or the fridge stops working. A well-built emergency fund gives you the means to cope if – and when – those bumps come up.
Even better, this shifts any reliance on credit cards or short-term lenders, and you can’t put a price on that kind of financial independence.
Financial guru Scott Pape of The Barefoot Investor fame recommends three months’ worth of living expenses as a solid measure to kick off this bucket. But the answer to how much you need is up to you – and that might be a dollar figure or several months’ worth of income.
Ideally, you want this buffer to cover key expenses like rent, utility bills, groceries, and transport.
How do I handle any financial insecurity around this account?
For emergency funds, the exact amount is up to you, your personal circumstances and how you feel about risk.
If you work in an unstable industry where layoffs are common, you’d be safer aiming for the higher end of the recommended range. But consider how much makes sense for your personal circumstances. Some people say less than six months of expenses in their fund makes them anxious – and others feel completely fine with three months on hand. In both cases, your individual circumstances and feelings about risk will play into your decision.
Once you have three months saved up, see how you feel. If you’re feeling uncertain or insecure when you hit your number, there are simple ways to address this practically.
Consider investing your money towards making your life less fragile and more resilient. When we say invest, we mean money that you’ve saved up outside of your emergency fund.
When you feel financially fragile, you become vulnerable to financial and economic shocks. Those shocks might come from an unexpected job termination (or a global pandemic), and sometimes, they’re unavoidable! All in all, what we’re aiming for is an anti-fragile financial life.
So aiming for a strong financial life is all about minimising those costs at much as possible. Even though saving for an emergency fund can feel out of reach, especially if you’ve got credit card debt or a vehicle loan, it’s important to start where you are. The biggest thing you can do is start building your savings habit.
Other ways to feel less financially-fraught:
- Invest in your personal and professional development
- Get insurance (renter’s, auto and health, to name a few)
- Build up a solid network you can tap for support if you need it
- Prioritise your physical and mental health
- Consider a side business if you have the bandwidth
- Create an additional revenue stream
- Work on practical skills like cooking
- Unsubscribe to marketing emails trying to sell you stuff you don’t need
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Kick your savings into high gear
Once you’re settled on your target amount, you can start building up that safety net. Just as you have with other big savings goals (hello, growing home deposit), you’ll know it’s worth starting with achievable milestones to get you there.
Hot tip: The government’s Money Smart website has a great savings calculator and links to resources that can help calculate those incremental savings and help you reach your target.
Here’s how to build that fund fast:
Set up a separate savings account | When your emergency fund’s mixed in with your regular savings (or, worse, your day-to-day dollars), it’s easier to justify dipping into it. So choose a high-interest savings account and label it ‘Emergency fund’. This will show you how much you’ve saved, and you won’t be tempted to dip in.
Set yourself a savings goal | Saving is a breeze when you’ve got a target to work towards. The purpose of this fund is to back you financially when you need it most, so work out that dollar figure and start saving!
Automate those savings | Take the hassle out of the process and set up automated transfers between the account where your paycheck lands and your emergency fund. Or check with your payroll team to see if they can direct a % of your wage into your emergency fund account. This is a great ‘set and forget’ move, and you can sleep easy, knowing your safety net is growing.
Maximise that offset account | Do you have a home loan with an offset account? You can use that offset account as your emergency fund. It’ll also lower your home loan interest payments and give you quick access to your money if you need it.
Boost your fund (when you can) | If you come into some extra money during the year (a little freelance gig or a tax refund), use this to boost your emergency savings.
Track that spending | Having a good budget means keeping track of the cash you’re splashing and not overspending. It also means identifying trouble areas in your spending. Cutting out incidentals like that regular cup of coffee will nudge you to contribute to your savings, even temporarily.
Let’s sum up
Life can be unpredictable. Extra expenses will come your way when you’re least prepared, but a well-structured emergency fund should help you weather any storm.
The moves you make should be consistent and motivate you to save. Saving should feel like a stretch but not an unsustainable one.
Rent.com.au is Australia's largest company dedicated to renters and is owned and operated by ASX-listed Rent.com.au Limited (RNT:ASX). For over 15 years, Rent.com.au has exclusively focused on making renters' lives easier by making it easier to find a property, secure it, move in and pay rent.