Emergency fund: What it is and how to build it

What is an emergency fund?

An emergency fund is an amount of money you set aside to cover unexpected expenses – a kind of financial fire extinguisher. It’s the cash you need in the case of an emergency, whether that’s an unexpected job loss, a sudden bout of ill health or even an appliance going on the blink. This fund is what stops you from having to reach for that high-interest credit card or being forced to sell off your investments just to get through the month.

Why might you need an emergency fund?

A large, unexpected expense can disrupt your finances, and can lead to long-term financial pain, especially if you need to dip into super or neglect bills to cover it. An emergency fund can help protect you from this.

A recent Canstar survey of 3000 people found that almost half (47%) of adults don’t have an emergency fund. More concerningly still, we found that almost one in three (31%) would not be able to raise $1,000 in an emergency. Around a quarter of the survey respondents said they would lean on a family member or friend to help them cover a big cost.

Saving a stash of emergency money can be good for both the bank balance and your peace of mind, letting you feel more optimistic and in control when faced with financial emergencies.

An emergency fund can also be a useful buffer to have in place for when the cost of living is biting, inflation is high, or events beyond your control disrupt the national or global economy.

How much money should you have in your emergency fund?

There’s no ‘magic’ amount that Australians should work towards when building an emergency fund – every household is unique.

A handy benchmark, however, is to have the equivalent of three months’ worth of regular expenses in your rainy-day fund. This can give you breathing space to pay bills, buy groceries, and maintain rent or home loan payments.

To figure out what you should be working towards, jump online and download a free budget planner, which can help to track your spending habits and bills. There are also budgeting apps available. Add up what you and your family spend on essentials each month, then multiply the total by three.

Canstar data insights director Sally Tindall offered some perspective on how much you might need in an emergency fund. Tindall says that a “ballpark” figure for an emergency find might be around $14,000.

This figure takes into account $1,000 a week spent on rent or the mortgage – which, unfortunately, is not uncommon for many Aussie households – along with food and bills.

What saving hacks could help me build an emergency fund?

Say you’re starting with nothing – how do you build up your rainy day fund? It may seem daunting, but these simple strategies to build up your savings:

1. Open a savings account that suits your finances

Some savings accounts impose strict conditions to earn the top rate of interest, such as making regular deposits and no withdrawals. Look for a savings account where you can easily meet the conditions to maximise the return on your money. This will help your savings build gradually over time.

2. Make savings automatic

Set up an automatic transfer that sweeps money into a separate account every time you get paid. Also, take the time to plan your year to automatically set aside expected cash injections such as your tax return, providing further boosts to your emergency fund savings. You won’t feel like you’re missing out on spending money if it’s going straight into your savings rather than passing through your regular bank account first.

3. Have a game plan to follow

A popular way to grow a cash stash is the 70:20:10 plan. Just divide your money between:

• 70% for everyday living
• 10% for splurging
• 20% for saving

You don’t have to stick to these ratios if they don’t work for you – play around with the numbers and your overall approach to see what works best for you.

If you are struggling with your finances, free counselling is available in Australia. You can contact the National Debt Helpline (NDH) on 1800 007 007. As well as running a helpline, the NDH helps consumers find individual counsellors and organisations near to them for support and advice.