The recent unpredictability of life has underscored the importance of financial preparedness. This is as important for older Australians as it is for younger Australians facing unexpected job cuts and sudden expenses. More than half of younger Australians confessed to being unable to survive beyond a month on their savings, emphasising the often-overlooked costs of financial instability.
To counter these challenges, the concept of an emergency fund has gained traction, serving as a cushion for essential expenses during times of either personal, or as we’ve seen recently global crises.
Establishing this emergency fund can be as simple as setting up automatic payments into a high-interest savings account, thereby building a financial safety net to cover at least three months of living expenses.
In this article we’ll discuss Emergency Funds, how to set one up and importantly fund one and more.
Lessons in financial planning
The recent challenges brought about by the unpredictable nature of life have taught us a valuable lesson – the importance of being financially prepared and having a financial plan. From unexpected job cuts due to lockdowns to sudden bills, or even assisting family in times of need, financial stability can quickly become a precarious situation.
The lesson learned, having a financial plan helps.
However, the harsh reality is that not everyone has a plan. In fact, research coming out of the pandemic has taught us that over half of Australians don’t even have an emergency fund.
What is an emergency fund?
An emergency fund is a bucket of money that acts as a cushion, specifically to cover crucial expenses during unexpected situations. These could range from car repairs, dental emergencies, medical costs to ensuring you have enough for rent and groceries for an extended period of time during a time of unemployment.
Essentially, think of an emergency fund as an insurance policy for yourself, protecting you from unforeseen financial storms.
How do I build an emergency fund?
Building an emergency fund doesn’t have to be an overwhelming task. Begin by setting up an automatic payment of a manageable amount. This could be as little as $20 per week. Over time, the aim would be to increase this weekly amount, so you are not really noticing the outgoing and not have to reduce your standard of living.
Consistent effort can accumulate into a substantial sum. Putting the savings into a high interest account that compounds means your saving also starts generating more savings!
By the end of the year, even if you don’t ratchet up the amount you could have a comfortable $1,000 stashed away in the Emergency Fund, allowing you to breathe a bit easier. Ideally, the aim should be to have enough savings to cover at least three months of living expenses. This way, even if you face unexpected circumstances and are unable to work for a brief period, you can ensure your basic needs are met.
How can I save money?
A few really easy ways to save money includes;
- Look for a lower mortgage rate than what you’re being charged. Speak to a mortgage broker, or your financial planner about how to reduce this.
- Cancel the subscriptions you no longer use. Netflix, Stan, Disney, etc etc. When you run through your bank statements / credit card statements for all the recurring payments you’ll be surprised about how much your spending, but not using.
- Consolidate debt. It’s a really simple way of reducing your spending month to month. Re-baseline your debt into a low interest rate environment. Speak to your financial planner or do the research as everyone has slightly different circumstances.
You can check out other money saving tips from our previous blogs.
Practical tips for building an emergency fund
If you are contemplating setting up an emergency fund, here are a few practical tips to simplify the decision-making process of how to set up an emergency fund:
- Opt for a high-interest savings account to make the most of your savings. The compounding effect of the interest can help you reach your financial goal faster. Some savings accounts have penalties for early withdrawals, acting as a deterrent to impulsive spending. Do your homework and understand the account you choose.
- Allocate the funds as soon as your wage hits your account. You can do this by recurring payments to make it simple.
- Keep your emergency fund separate from your daily transaction account. This will reduce the temptation to splurge unnecessarily, ensuring you stay on track to meet your savings target. You can even select a different bank to make it even harder to “accidentally spend”.
- If you do dip into your emergency fund, prioritize replenishing it as soon as possible. The effectiveness of this safety net hinges on consistently maintaining an adequate balance.
Is an emergency fund worthwhile?
An Emergency Fund should provide you with the freedom to take some well-deserved time off for relaxation or even invest in personal projects that excite you. While managing all of this may require a bit of budgeting effort, the security and peace of mind it brings can be invaluable. Ultimately an Emergency Fund is simple to set up and brings financial peace of mind. An emergency fund is a critical part of a financial plan. No need to rush the accumulation of money, this will happen naturally over time.
Forrest Private Wealth
Forrest Private Wealth are Perth financial planners specialising in financial planning, retirement planning and wealth management. It’s easy to book a free 15 minute virtual coffee with one of our team of financial planners to discuss your circumstances. We can then either put you on the right path or work with you to set a financial plan and assist in managing aspects of your financial life. Ultimately, we want to ensure you have the retirement you want and to make your life better through financial guidance.