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Why do you need an Emergency Fund?

An Emergency Fund is fast becoming an integral part of the common budget. To give your finances a ‘safety net’ of stability, emergency funds serve a very useful purpose for us all towards reaching financial goals.

READ MORE: How to recession-proof your life in 6 steps

What Is An Emergency Fund?

An emergency fund is exactly that. Funds for an emergency. This isn’t the money you chip in for a potluck dinner with. An emergency fund is money set aside for unexpected costs that inevitably come up during life.

This could be a range of expenses; car repairs, medical expenses, family emergencies, unexpected travel (not holidays), home repairs, etc. The purpose of an emergency fund is to create for yourself and your family a safety net. Money that will be able to safely cover you in the case of an emergency.

Providing you with more financial security so you don’t have to borrow money if something happens to you or your family.

 ‘rainy day’ savings is a key goal for two out of five Australians in 2020, according to research. Yet, many Australians are struggling to build an emergency fund that can provide them with much-needed relief when they require it. – canstar.com.au

As I’m writing this, I am actually intending on using a small part of my own emergency fund. Over the weekend the weather was as perfect as can be. I took my motorcycle for a ride down the south coast of New South Wales to the beautiful beaches.

Parked up. Went for a swim at the beach. Came back to my bike after. I got a parking ticket. I was honestly completely oblivious that there was no parking where I had parked. I can’t afford to pay it from my regular spendings. So, that’s where my emergency fund is coming to the rescue.

How Much Should You Have In Your Emergency Fund?

There is no exact number as everyone’s financial circumstances are different. A good starting point is to aim for around $3,000. Once you’ve saved $3,000, you should move onto the next step and savings target of 3 months of living expenses. Those are the general targets that most people who have emergency funds aim for. 

Although, these amounts are just recommendations. It is entirely up to you to decide how much you think you will need in your fund to cover any and every ‘emergency’ that might occur. 

Remember, emergencies do come up. Regardless of lifestyle, something will pop up out of the blue that will require quick access to cash. You are preventing future stress and panic by starting an emergency fund.

Where To Start?

Budget 

You may first need to set up a budget if you haven’t already. Setting up a budget can be tough, but once you know where your money is going you have taken the first step towards more financial stability in your life. 

Here are some of our best budgeting tips.

Savings

To start, you need to save. In a savings account. A separate high-interest savings account. Separate from all your other finances to be sure you don’t dip into it. Do your research on savings accounts from different financial institutions and compare. You want to get the most out of your emergency fund whilst it sits in the bank, it should be gaining interest. Growing your money is a very important part of having savings.

Here is how we split our savings every month.

Automate

Set up an automatic transfer that will send money automatically from your checking account into the savings account/emergency fund every time you get paid. 

Having this automated will take the temptation to skip a week of saving away from you. As well as save you time manually transferring. This will make contributing to your emergency fund effortless. Having your savings automated helps you save much easier. Basically, a set-and-forget task.

Summary

Contribute to your emergency fund automatically by having your bank debit the regular amount every time you get paid. Have your emergency fund in a high-interest savings account where it can gain interest as you contribute to it.

Once you hit your target amount, do not stop there. Continue contributing to your fund to increase your level of financial security. If an emergency arises, you can rest assured knowing that paying for whatever that emergency may be is going to be paid for easily.