What’s an emergency fund?
An emergency fund is an amount of money you keep aside to pay for sudden and unexpected financial needs.
They’re for the events that can really knock you off course: think large, unplanned expenses such as car repairs and job loss.
How big should your emergency fund be?
Most experts generally agree that your emergency fund should be able to cover your average monthly expenses for a period of months.
This is in case you lose your job and it takes you a while to find a replacement.
So how long should it last you?
- Vanguard says you should have enough to cover you for three to six months worth of living expenses.
- Moneysmart says it should be three months of living expenses.
- CommBank says you should start with one month’s worth of living expenses, and go from there.
- The Barefoot Investor says three to six months of living expenses.
Some people set a short-term goal of one month's worth of living expenses, and then build on it over time.
How do you work out your monthly living expenses?
Calculate your fixed bill costs such as housing and insurance. Then add your best estimate for your variable costs, such as supermarket and transport expenses.
Where should you put your emergency fund?
You never know when you'll need to dip into your emergency savings, so it's important to keep them where you can quickly access them.
But you don't want them to be so accessible that they tempt you to spend them every time you see them.
So where’s the best place to keep your emergency fund?
Many people keep theirs in a high-interest savings account or a mortgage offset account.
Some high-interest savings accounts have added incentives to help you grow your balance and dissuade you from withdrawing your money.
Mortgage offset accounts link to your home loan. If you keep savings in your mortgage offset, it could reduce the amount of mortgage interest you pay.
It may not be the best idea to keep your emergency fund in the stock market or a term deposit account.
Selling stocks to pay for an emergency means you might have to sell at a low.
And term deposit accounts can charge you fees for early withdrawals.
Consider getting personal financial advice if you're unsure where to keep your emergency fund.
20 ways to build your emergency fund (EF)
Building up your emergency fund can be more fun than you imagine, and happen quicker than you think.
You can reach your savings goals and improve your finances, even if you don't see yourself as a budget planner.
Here are some ideas to start saving.
- Dedicate a percentage of your salary to your EF – then increase it by 1% each payday.
- Set up automatic transfers to put your EF savings in a high-interest account.
- Keep one streaming subscription active, pause the others, and redirect your savings to your EF.
- Find free alternatives for paid services and put your savings in your EF.
- You can usually get free ebook, audiobook, TV and movie subscriptions from your local library. Keep your savings in your EF.
- If you sporadically use the gym, you could replace it with YouTube workouts and online programs for EF savings.
- Make dinner instead of getting meal delivery and pocket the delivery fee into your EF.
- Round up your rent/mortgage to the nearest $100 and put the excess into your EF.
- If you haven’t reviewed your utility providers in a while, redirect any savings you find into your EF.
- Put a percentage of unexpected money, such as tax refunds, bonuses, raises, or when you find $50 in your winter coat, into your EF.
- Have a no-buy month and put the savings in your EF.
- Create a ‘bad habit’ jar and fine yourself for your bad habits – such as sleeping in or not bringing your lunch to work. Transfer your bad habit jar savings to your EF.
- Use cashback apps and gift cards, then deposit your savings into your EF.
- Keep the change, then put it in your EF.
- Live on your ‘minimum viable lifestyle’, or emergency budget, and pocket the savings in your EF.
- Add a time delay to your purchases. Decided you don't need that new pair of sneakers after all? Direct the money you ‘saved’ into your EF.
- Swap something you pay someone else to do, to something you pay yourself to do. We’d never advocate for giving up your daily latte. But paying yourself $7 to make it is something we can give a thumbs up to.
- Review last month’s bank statement and pick your most expensive variable cost. Aim to reduce it by 10% this month, and save that money in your emergency fund.
- Paid off a debt recently? Keep making your repayments, but pay them instead into your EF.
- Made an unplanned purchase? Double the amount you spent on that Kmart gadget or Aldi special buy, and put it in your EF.
- Pick a non-essential but recurring expense and cut it out or find a cheaper alternative for just one month. Catch a lot of Ubers? Now you catch the bus. Put the savings in your EF.
- Have a staycation instead of a holiday and pocket the savings in your EF. Depending on your normal travel habits, this could skyrocket your EF savings.
Having an emergency fund could help make you a better investor
Long-term investors know that markets go up and down alongside the value of their investments. Having an emergency fund can make it easier to stomach the swings.
You may not worry as much about your investments during turbulent times.
You'll know your emergency fund is there to keep you covered during rainy days, while the markets do their thing.
Keep in mind
While these are general ideas that can help you build up your savings, it’s not financial advice. To get personal financial advice, we recommend speaking with a financial professional, such as a financial planner or an accountant. It is important to consider the benefits and risks associated with the financial decisions you make.
