Peace of mind comes at a cost.
And having an emergency fund, rainy day fund or a savings buffer — or a combo — can be a smart way to help you manage life's ups and downs.
Research undertaken in the US found that almost 40 per cent of people can't afford to pay for an unexpected $400 expense, or could only do so by borrowing or selling something.
While these are overseas figures, it seems fair to say Aussies are probably similar.
But you don’t need these stats to know why an emergency fund is usually a good idea.
You probably already know it can help to keep your finances running smoothly when something unexpected and costly comes up. And by being prepared, you don't have to resort to selling stuff, borrowing money from family or friends, or turning to payday lenders.
The cherry on top is that an emergency fund can offer you confidence, independence and greater control over those future uncertainties.
So, if you're convinced it's worth it, now you need to decide: how much should you put away?
Well, there is no simple answer, so let's explore what the money experts advise.
You might find guidelines range from $500 to 12 months’ worth of income — a wide scope!
Vanguard, one of the largest money managers in the world, suggests you break down your critical expenses first, which will help to inform the right figure for you.
You start by identifying the minimum amount you would need to fund your essentials if things went pear-shaped. Think housing, food, healthcare, transport ,and debt payments.
From that point, you can begin to calculate what size emergency fund might be appropriate.
Closer to home, straight talking Aussie money man Scott Pape recommends saving three months’ worth of living expenses; that’s the sweet spot. He says this is enough to give you your 'mojo' and buy you that sought after safety net.
Then there’s US money whiz Suze Orman, who errs on the conservative side when it comes to suggesting the optimum emergency fund balance.
Suze opts for a minimum of eight months’ worth of living expenses, but says you’d ideally want 12 months’ worth of living expenses saved. As she puts it: “A million potential scenarios could drain your savings without warning.”
Of course these are only guides; there is no magic number that will work for everyone.
So, how much do you need? Perhaps the better question to ask yourself is: what will help you sleep at night? Is it a dollar figure? Is it six months’ worth or 12 months’ worth of your living expenses? You determine what is right for you, and start from there.
