No one likes worrying about large unforeseen bills or financial emergencies. From a busted laptop, to losing a job, or a messy break-up, an emergency fund ensures you have enough money to get through.
An emergency fund is a stash of cash that you can access to help cover the cost of any urgent and unexpected expenses. It’s money that you have specifically saved up and put aside. As the name says, it’s for emergencies only, not for that new dress or shouting drinks on a Friday night.
Is saving money for an emergency fund really necessary?
Building an emergency fund is a fantastic way to form good money habits, savings momentum and empower yourself to be more financially confident. And it means you won’t have to dip into that growing house deposit, or rely on high interest loans or credit cards if you find yourself in a sticky situation.
How much emergency savings should I have?
According to Mozo, an emergency fund should have enough money to cover three months’ worth of expenses. Think about all the bills, financial commitments, and expenses you need to live on for three months. Those iced lattes and Friday drinks shouldn’t be accounted for, but costs like rent or mortgage repayments, groceries, insurances, medicine and transport costs should be included.
Of course, if you have a mortgage you’re paying off, or little ones to care for, you might want to plan ahead for longer. If starting with three months’ worth of expenses is a daunting goal, start with a round number like a balance of $3,000 to build momentum. The most important thing is to start saving.
How do I build and maintain an emergency fund?
Developing an emergency fund strategy is easy; it just takes a little planning and commitment. In no time you’ll be seeing progress and feeling more secure.
1. Track your expenses.
By recording where your dollar goes (those froyos can really add up), you can see where you can cut back and save.
Once you have a clear idea of all your expenses, you’ll know how much money you can contribute, where you can cut back, and how frequently you need to deposit to reach your emergency fund goal.
Use a savings calculator can help breakdown the periodic payments you’ll have to make to reach your balance.
2. Set some ground rules about what your emergency money is for.
Set a few guidelines about what your emergency savings can be used for so you’re not open to temptation. Expenses like vet bills, unforeseen medical bills or, if you end up without an income and need to pay your rent, are things to think about when devising your emergency spending guidelines.
Remember, we’re trying to establish good money habits here, so setting some parameters is key to long-term success and financial comfort.
3. Build one-off bills into your budget.
Annual expenses like insurance renewals or car registration aren’t a financial emergency. These expenses can be planned out and saved for by setting a budget and using multiple savings accounts.
You can set up separate savings accounts for each of your major savings goals, using a ‘Bills’ account to smooth out your larger expenses. Put a small portion of your budget towards a bills saving account to build a buffer for those larger periodic expenses.
4. Avoid impulse buying and maintain your focus.
Until you’ve hit your emergency savings goal, avoid impulse purchases and try to stick to your savings plan. Get serious about building your emergency fund and dedicate any spare cash you have until you reach your initial goal. The momentum of knowing you’re creating a safety net should be able to keep you going when tempted by those Friday night cocktails or a cheeky ASOS order.
5. Keep it separate.
A key aspect of this savings plan is deciding where to store your emergency funds. Ideally, you need an account that’s accessible, but not so easy to access that it becomes your go-to money for impulse buys.
A good plan is to keep your emergency savings in a bank account that’s not directly connected to your transaction account, making it harder to transfer out of. A savings account can be a good option, especially if you let interest earnings do part of the heavy lifting by choosing an account paying a consistently good rate with no strings attached.
An account that won’t sting you for moving your money around is a bonus, so there are no penalties when you need to access your emergency dollars. A high interest savings account with ME can give you some juicy rewards for your self-control.
6. Keep it topped up.
Hopefully, you won’t have to use your emergency fund anytime soon – touch wood! But, if you do, make sure you continue to top it up on your next payday.
Plus, if you get some extra cash during the year – like birthday money from Grandma or your tax refund – you could always put some of this moolah towards your emergency fund.
Future You will thank you for having these funds available at a moment’s notice. It’s like always keeping a few cans of baked beans in the pantry in case the oven breaks.
Start building a secure future.
With a pool of emergency funds under your belt, it’s easier to protect your future self. You’ll be ready for any bumps in the road and a small financial hiccup won’t plunge you into debt or eat into a house deposit you’ve saved so hard for. If you’re ready to start stacking your emergency savings, ME can help you reach your goals sooner.
Build your emergency fund with SaveME.
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This article was sponsored by ME.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.