Life can be unpredictable, and sometimes that can mean a hit on our finances. Building an emergency fund could help you manage your stress and financial pressures in unexpected situations. Like having your own financial safety net, saving some extra money is a good habit to feel confident and prepared for whatever pops up.
Let’s dive into the different ways having an emergency fund could help, and the steps you can take to start building or growing one.
What can an emergency fund help with?
1. Unexpected expenses
We've all been there – a sudden crack in your car windshield, a leaking pipe, an unexpected trip to the vet. Running into these expenses when you haven’t budgeted for them can be stressful.
An emergency fund could help soften the blow by giving you access to funds when you need it. Having these savings readily available could also help you save time, reducing how long it would otherwise have taken you to look for extra cash.
Beforepay could come in handy for times like these, making it easy and convenient for you to access up to $2000 for a fixed 5% fee when you need it (subject to eligibility). Having a cash buffer with your emergency fund could give you the added comfort of managing your unexpected expenses without impacting your current cashflow or budget.
2. Keeps you afloat during job loss
Losing your job can be a massive curveball. According to research by NAB, more than 1 in 10 Australians don’t have $2000 saved in case of an emergency. Without a constant source of income, it might become more difficult to plan your spending and budget for your living expenses, such as paying for your bills and groceries.
Having an emergency fund could give you the buffer and breathing room to manage your expenses when you’ve lost your job. And since it’s your savings, you can feel confident knowing you can support yourself with extra funds while searching for new opportunities without going into debt.
3. Covers unexpected medical expenses
We never want to anticipate falling ill. But since healthcare can be hefty and unpredictable, even with health insurance, having funds prepared just in case can reduce the stress and financial pressure of managing it if and when you find yourself in this situation later.
An emergency fund could help you manage unforeseen medical expenses without going into debt or sacrificing your financial wellbeing. It could also come in handy for a range of situations, whether it’s an unexpected medical expense for yourself, a family member or a pet.
4. Reduces financial stress
Money can be a significant source of stress.
A report by the Australian National University revealed 1 in 4 Australians (25.1%) find it difficult to manage their expenses on their current income, with increasing levels of financial stress.
Having a safety net with the money you’ve saved in your emergency fund could help bring you peace of mind, giving you the confidence to handle whatever life throws your way without feeling like you have to go into long-term debt with a large, interest-accruing loan.
How much should you save for an emergency fund?
The amount you save for your emergency fund depends on your personal situation, including things like your income and expenses. As a general rule of thumb, financial experts suggest it’s good to aim to save 3 to 6 months’ worth of expenses. In the case of losing your job, for example, this could help equip you with extra cash to pay for expenses such as rent or mortgage repayments, food and utility bills.
This might sound daunting, but don't worry – you don't have to do it overnight. Start by setting a goal and working towards it steadily.
Remember, everyone's situation is different, so consider factors like job stability, the number of income earners in your household, and existing debt.
Here are some quick and easy steps you could try to start building your emergency fund.
1. Assess your expenses
Get a clear picture of your monthly living expenses. You could look at your bank account, statements or spending insights in the Beforepay app to understand how much you regularly spend and on what. This might include your rent or mortgage, utilities, groceries, insurance, transportation, and any other essential costs. Exclude discretionary spending, like entertainment or dining out, as you'll likely cut back on these if an emergency arises.
2. Set a goal
With a clear understanding of your monthly expenses, set a goal for your emergency fund based on the recommended 3 to 6 months' worth of living expenses. Remember, it's okay to start small and work your way up.
You could start by setting a small amount you can put aside for your emergency fund the next time you’re paid. Once you get comfortable, you could then consider increasing this amount and slowly work towards your 3-6 month savings goal.
3. Create a budget
A budget is essential for managing your finances and reaching your emergency fund goal. Track your income and expenses, identify areas where you can cut back, and determine spending limits to help you stay on track with spending only what you need.
There are a few tools you could use for this – you could set up your own budget tracker in a spreadsheet, check if your online banking has a tool, or use the free budgeting tool in the Beforepay app that creates a fully customisable budget for you based on your recent spending history.
4. Automate your savings
Consider linking the account you receive your wages into a separate account dedicated to be your emergency fund. You could then set up an automatic transfer each payday to help you slowly and steadily build your savings. This "set and forget" approach ensures you're consistently saving without even thinking about it!
You could also think about opening a high interest savings account and have your money earn a little extra for you. A long-term investment like a term deposit might not be ideal for emergency situations as the funds might not be accessible when you need them. One option you could consider is a high interest savings account to help your savings grow. Check sites like Mozo, Finder and moneysmart.gov.au to help you find a high interest savings account that’s right for you.
5. Reassess and replenish
Reassess your emergency fund goal periodically to ensure it still aligns with your current situation and expenses. If your circumstances change, adjust your goal accordingly.
If a situation arises where you do need to use your emergency fund, make sure to replenish it as soon as you can so you’re constantly prepared for whatever pops up.
Building an emergency fund is a crucial step in achieving financial independence and reducing stress. It provides a safety net for unexpected expenses and life events, allowing you to navigate challenges without compromising your financial health.
Disclaimer: Beforepay Group Ltd, ABN: 63 633 925 505. Beforepay allows eligible customers to access their pay and provides budgeting tools. Beforepay does not provide financial products, financial advice or credit products. The views provided in this article include factual information and the personal opinions of relevant Beforepay staff and do not constitute financial advice. Beforepay and its related bodies corporate make no representation or warranty, express or implied, as to the accuracy, completeness, timeliness or reliability of the contents of this blog post and do not accept any liability for any loss whatsoever arising from the use of this information. Please read our Terms of Service carefully before deciding whether to use any of our services.