Put your best financial foot forward: grow your emergency fund

You can plan for many things in life, but if you had an emergency – like your car breaking down, or suddenly needing an ambulance – would you have the cash ready to pay for it?

One in three Australians wouldn’t, according to research. Which is scary.

In fact, studies show that around 50% of Australians have less than $1,000 in their bank accounts, and 33% of us don’t have emergency cash on hand. We just wouldn’t be equipped financially to handle a financial curveball – and chances are, we might be forced to borrow money or rely on credit to cover the debt. 

However, there is one solution that can help reduce your stress and give you some peace of mind: Starting an emergency fund. Here’s how to get started:

The importance of building an emergency fund

It’s no secret that the cost of living is at a record high – and you’re not alone if you’re stretched tight for essentials like groceries, rent, utilities and insurance if you have it. It’s the kind of anxiety that could keep you up at night.

And it’s exactly why it’s so important to have emergency money on hand – preferably in an account you don’t touch. 

An emergency fund is something you can work towards growing over time, and it provides you with a valuable safety net in case you are faced with an unexpected expense you hadn’t budgeted for in your day-to-day spending.

Situations where you might need an emergency fund

Typically, an emergency fund is a pot of money you should only dip into in dire financial circumstances – not that last minute holiday to the Maldives you just spotted on a discount travel newsletter! 

As a rule of thumb, it’s for expenses that you have to pay right away. For example:

• Your car needs repairs, and you use it to get to work
• A fridge or other appliance breaks down
• You or a member of your family has an urgent medical bill
• You have to travel unexpectedly (e.g. if a family member who lives far away is sick)
• You lose your job and need immediate funds to cover bills and the mortgage

How much savings should you have in your emergency fund?

Everyone will probably have a different answer to this one, but as a rule of thumb, experts suggest working towards an emergency fund that can cover expenses for at least three to six months. 

You’ll probably have to slowly build up to this amount, but at least enough funds to cover expenses for 3 months is a good initial goal to shoot for. Some people prefer having a year’s worth of expenses on hand. Others might only be able to afford to save a month’s worth. It’s really up to you and your personal circumstances and ability to save.

Not sure how to figure out your monthly outgoings? Use a budget planner to add up regular expenses you have to pay each month (such as rent or mortgage payments, insurance payments, groceries, utilities, travel and other day-to-day spending). Once you arrive at a figure, triple it. That’s your emergency fund target to start saving for.

Related: Find out how you would maintain your lifestyle if you couldn’t work for a long period of time due to sickness or injury.

How to set up your emergency fund

You can create an emergency fund in a standard, high interest online bank account, but it might a good idea to make sure the account you choose can’t be easily accessed. 

For example, you might want to choose an online account that you can’t access via an ATM, only by transferring money to another account. This can stop you being tempted to dip into the emergency cash you’ve accumulated.

Tips on how to start and grow your fund

1. If your goal is three months’ worth of expenses and one month of expenses is $4000, knowing your target is $12,000 can be sobering. So break it up into smaller goals.
2. Use a savings calculator to work out how much you could save in a year so you feel more motivated to keep going. For example, if you save $20/week into your emergency fund, you’ll save $1067 in one year.
3. If an expense crops up and you use your emergency cash to pay for it, don’t forget to top up your fund later.

Other practical tips on how to put aside funds

Our top ideas for growing your emergency cash:

1. Automate savings to your fund: You could either set up an automatic transfer from your main account to your emergency fund, or ask your employer to transfer a set amount out of your wages to your emergency account.
2. Use the round-up facility: If your bank has this facility, it’s a great way to build your emergency cash over time. Once activated, your bank will round-up to a certain amount on any purchases you make (so you might nominate your bank to round up to the nearest dollar, or the nearest $5. The extra ‘rounded-up’ bit of cash will be transferred to your nominated savings account – like the one with your emergency fund).
3. Add extra funds to it when you can: If you get a tax refund or an inheritance, you can funnel a portion into your emergency fund – it’ll boost your nest egg and help keep it growing.
4. Use your offset account: If your mortgage has an offset facility, you can funnel emergency funds into the offset account. In doing so, you’ll lower your home loan interest payments and you’ll be able to access your emergency cash if you need it for an unexpected expense.

An emergency fund is just one of those financial essentials that can help give you peace of mind. Another way to have financially safeguards in place for your future is by protecting your income. Learn about Guardian Income Protection Insurance to see how it can help protect you against the unexpected. Request a quote online today.