Building an emergency fund is one of the most effective ways to safeguard your financial wellbeing. If you often juggle complex financial responsibilities, a well-established emergency fund is essential for maintaining stability and peace of mind.
‘According to Compare the Market’s latest research, 1 in 10 people surveyed say they don’t have a cent in their savings to use in emergency situations.’ So if you haven’t started yours yet, you’re not alone!
What is an emergency fund?
An emergency fund is a dedicated pool of savings intended to cover unexpected, large expenses that can strain your finances, such as medical emergencies, car repairs, or a sudden job loss. An emergency fund acts as a robust financial cushion, offering a layer of security that helps keep you afloat during tough times.
Why you need an emergency fund
Unexpected expenses can catch anyone off guard, leading to financial stress or even debt. Anything can happen in a blink of an eye. Such as:
Medical emergencies: With healthcare costs rising, an unplanned hospital visit can be expensive.
Job loss: Employment markets can be unpredictable, especially in uncertain economic climates.
Car repairs or replacement: If you rely on a car, sudden breakdowns can significantly impact your budget. Not to mention getting to work on time or running errands.
Without an emergency fund, dealing with these situations often means resorting to credit cards, borrowing, or sacrificing other financial goals.
Research shows that Australians with financial safety nets are less likely to experience long-term financial hardship during unexpected events. In fact, having even a small buffer can drastically reduce stress levels and improve overall wellbeing.
Setting your savings target
Most Australians (median across all ages) have $5,000 in their emergency fund. The amount you need in an emergency fund varies depending on your life stage and circumstances. Here’s a general guide:
Young professionals: Aim for 3-6 months of essential living expenses, as you may have fewer dependents and lower fixed costs.
Parents or individuals with dependents: Consider 6-9 months of expenses to account for increased financial responsibility.
Key factors to consider when setting your goal include monthly living expenses, job security, health costs, and dependents. Generally, the more obligations you have, the larger your emergency fund should be.
How to build your emergency fund
Automate your savings: Set up automatic transfers to a separate savings account each payday.
Budget for emergencies: Include a specific emergency category in your budget, ensuring you prioritise this fund every month.
Track and optimise: Use budgeting tools to monitor your expenses and free up extra money for your emergency fund without impacting other savings goals.
Quick tips for building your emergency fund:
- Set up automatic transfers to a high-yield savings account.
- Allocate tax refunds and bonuses directly to emergency savings.
- Cut non-essential expenses temporarily.
- Consider a side hustle for additional income.
- Start with a small goal of $1,000 before building to larger amounts.
Starting an emergency fund may not be the most fun thing in the world, but every contribution helps. Taking action now can make all the difference when life throws a curveball.
Piteo Accounting and Advisory is here to help you build a tailored savings plan for a secure financial future. Connect with us today to get started on a path to financial resilience.
