Saving for an emergency fund
Life is unpredictable, and emergencies can happen at any time. Without proper planning, these unexpected expenses can suddenly impact your financial stability. That’s why having an emergency fund is important to protect yourself from life’s ‘what if’ moments. Saving for an emergency fund is like building a safety net for your financial situation that can help cover unplanned expenses such as medical bills, loss of income, or car repairs. But how much should you save, and how do you get started? In this article, we’ll provide you with some strategies for saving for an emergency fund.
Why having an emergency fund is important
One of the biggest benefits of having an emergency fund is the peace of mind it can bring. Knowing that you have a financial cushion to fall back on can help alleviate stress and anxiety during difficult times. It can also help prevent you from going into debt or relying on credit cards to cover unexpected expenses.
As budgeting and money management experts, we’re especially conscious of the potential impact that an unexpected break from work can have on individual and household finances.
Securing your financial future takes disciplined spending and a forward-looking approach.
Whether it’s for a rainy day or something more serious, saving money for financial emergencies can keep you on the path to meeting your savings goals.
How much money should you save?
While there’s no magic number to how much you should have in your emergency savings, a good rule of thumb is to have three months of expenses saved. Imagine (touch wood) that you lose your job or are suddenly without a consistent stream of income; this emergency savings is designed to provide at least a quarter of a year to find a replacement income.
However, if you’re able to, or want to look more long-term, it’s worth having more funds put aside in the case of life-altering events – for example, if you need to take time off to look after a family member.
Create a budget to determine how much you can save each month
To determine how much you can save each month towards your emergency fund, start by creating a budget. Take a close look at your monthly expenses and income, and identify areas where you can cut back on non-essential spending. Even small amounts saved each month can add up over time and help you build a solid emergency fund.
Casuals, contractors and gig workers saving money for emergencies
An emergency fund is something all casual, contract and gig workers absolutely need to consider as they have a variable income with no paid leave entitlements to fall back on.
If someone becomes sick or the business has a quiet period and they have to reduce their staff hours, then casual workers are often the first to suffer. They might have their hours reduced and they are not entitled to sick leave if they have to take time off.
Permanent workers saving money for emergencies
While permanent workers have leave entitlements to fall back on, those who use up their entitlements quickly may be vulnerable during uncertain times.
It’s certainly not uncommon for flus and colds to work their way through families one member at a time, while one or another parent takes carer’s leave for one child after another. Some employers require staff to use personal or unpaid leave to do so, all of which adds up to greater demand on leave entitlements.
How to build an emergency fund
Considering 44% of Australians can only survive off their savings for one month or less (55% for Gen Z), establishing healthy saving habits early can lead to long-term financial stability. In an attempt to reduce this statistic, we’ve brainstormed a few options:
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Choose the right type of savings account
Once you have a budget in place, it’s important to consider the right type of savings account for your emergency fund. Banks and credit unions offer wide ranges of high-yield savings accounts, each with varying amounts of interest rates and fees. Some accounts also apply access restrictions to avoid having ease of access, thereby reducing the temptation, such as having to physically go into a brick-and-mortar bank branch and signing for it then and there. However, be sure to consider how quickly you’d need access to funds in the case of emergencies; you wouldn’t want any medical emergencies to happen on a Saturday and you’d need to wait until the bank is open on Monday morning.
Set up automatic transfers to your emergency fund
Once you’ve chosen the right savings account for your emergency fund, consider setting up automatic transfers from your regular account to your savings account. This will ensure that you’re consistently contributing to your emergency savings fund without having to think about it: out of sight; out of mind. You can set up these transfers to occur on a weekly, fortnightly, or monthly basis, depending on what works best for you and your budget. Over time, these small contributions will add up and help you build a solid emergency fund.
Work extra when you can
If you’re worried about losing income in the future and you have the opportunity and capacity to work extra now, ask your boss for more hours. One of the quickest ways to save money for emergencies is to earn more and make direct deposits, or get ahead on debt payments. The important thing is not to spend your extra money, but to keep them set aside for future contingencies. If you don’t already have a separate bank account for your savings, open a no-fee account online.
Suspend unused subscriptions
A quick win for your budget – and a great way to generate spare cash – is to suspend or cancel your subscriptions. Pay TV services, gym and club memberships, newspaper and magazine subscriptions and meal box services are some common examples of monthly costs that may no longer be necessary. It doesn’t have to be forever; just while you build up some savings or get back on your feet.
Avoid temptation to spend the money on non-emergencies
It’s important to resist the temptation to dip into your emergency fund for non-emergencies and nonessential expenses. This is where access restrictions can help as when you can’t spend your emergency savings on an impulse, you’ll need to strongly consider whether the purchase is really necessary. Additionally, remind yourself of the importance of having an emergency fund and the peace of mind it can bring in unexpected situations.
Avoid using your credit card or Buy Now Pay Later
Make sure you’re living squarely within your means and not overspending. This is an especially important emergency fund tip for people who are concerned that their current income may fluctuate or be unreliable in the future.
The key to living within your means is to create a budget and stick to it. One quick way to achieve this is to avoid making purchases with credit cards or Afterpay, and simply rely on what you have on your debit card or in cash. A detailed budget will show where your money is going, how much you need to account for living expenses and how to make the most of it.
Reassess and adjust your savings plan as needed
As you continue to save for your emergency fund, it’s important to reassess and adjust your savings plan as needed. If you find that you’re not able to save as much as you’d like, consider cutting back on non-essential expenses or finding ways to increase your income with a side hustle or overtime. Or, perhaps your emergency savings plan was a little aggressive and is beginning to cause some stress, in which you may need to reduce how much you’ve set up to be automated from your income.
On the other hand, if you find that you’re able to save more than you anticipated, consider increasing the amount you contribute to your emergency fund each month, or putting extra funds into loan payments or mortgage payments. Regularly reassessing and adjusting your savings plan can help ensure that you’re on track to meet your financial goals.
Ready to follow these emergency fund tips so you can take on any of the curveballs life throws at you? If you’re still unsure on how to go about saving money for emergencies or need help with budgeting and achieving your financial goals faster, give us a call on 1300 300 922 or enquire online.
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