You may never grasp the concept of needing an Emergency Fund until you realise you can’t pay the rent with your credit card. This awful moment could come as a shock after a sudden job loss or when your car breaks down and your ‘emergency credit card’ is maxed out with last month’s online purchases.
By having a dedicated cash Emergency Fund of $1,000 could keep a roof over your head and your butt off the bus.
Why $1,000? This $1,000 would cover the insurance excess on most policies you might have such as car insurance, it could also cover a few weeks rent until you find another job or airfares to visit a sick relative – this is what Emergency Fund accounts should be used for and here is a five step guide to get you there.
#1 Open a separate bank account
Use your internet banking, telephone or go into a branch and open an everyday savings account, you don’t want your money tied up in a term deposit or shares. These funds need to be accessed quickly in an emergency but you also don’t want it to be too easy to access, so perhaps opt out of having a debit card activated. If you need the money you can always transfer to your everyday access account via your internet banking or go into a branch.
The harder you make it to access the funds, the better. You don’t want to find yourself digging into your rapidly growing Emergency Fund for the sake of a takeaway dinner.
#2 What is your starting point?
Raid your desk draws at work, your wallet, the couch and car – anywhere that there may be loose change, then have a look at your bank account – is there any money there that you could do without until next pay day? Place this loose change and spare cash into your new Emergency Fund account, let’s say you find a total of $140 to put towards your Emergency Fund.
You should also consider finding items around your house that are easily sellable to retrieve the money you may have spent on past purchases (before your new proactive outlook to saving money).
#3 Synch your money and budgeting with your pay cycle
By the time your next pay cheque arrives to ensure you have a budget that suits your pay cycle in place, for example, fortnightly where you tally your up bills and expenditures divided into fortnightly amounts (you can get a handy budget spreadsheet to make things easier). Do you have money left over from your budget? If so, then place this money into your Emergency Fund account, let’s say you have a $200 surplus you can contribute this month.
#4 Focus on decluttering, use the ‘clutter’ to fill your emergency fund
Declutter your house or call it minimalism if you want to sound trendy to your friends while you go through your DVD collection this Friday night and sort the things you no longer want or need that are in good condition. Have three boxes ready, items to bin, to donate and items to sell, find help with decluttering here.
Selling items is a great way to retrieve a bunch of cash a declutter in the process.
Take photos of the items to sell and list them on eBay and gumtree.com.au. if you have lots of furniture and appliances then a garage sale may be the way to go, let’s say you made from the sale of your items a total of $480. Read how to run a successful garage sale for tips on maximising how much you make.
#5 Cancel expenses and use the cash to grow your emergency fund
Cancel any subscriptions you may have for magazines, Pay TV or even the gym – if you have not gone in the last month then this is money back in your pocket until you are motivated again. For example, you may have an $80 per month gym membership and a $100 per month Pay TV subscription, that’s another $180 you can put towards your Emergency Fund.
You now have a total of $1,000 in your cash Emergency Fund! Now before you get too excited remember this money is to just sit and look pretty in your bank account until a real emergency arises. Give your fund a boost each pay by adding a small amount of money into this account and if you end up spending the money (for an emergency of course) top it up as soon as you can.