‘I’m not going to be on the back foot this year’. ‘I’m going to be more capable of taking financial opportunities’. ‘I’m not going to let small things throw me off entirely’. All this is another way of saying that this year, you want to have an emergency fund that will stave off any need to get into debt or compromise your financial security should any unexpected situation arise.
Experts generally suggest that you should save between three and six months salary in order to be completely protected. That’s a big amount, so there are tips below for how to set aside the money. The reason it’s such a big figure is due in large part to the emergency fund as a risk management strategy for unemployment. You would want to be able to live comfortably, and certainly avoid debt, should you unexpectedly lose work and have to spend a couple of months looking for work.
The other example would be if there was a medical emergency, and while most costs are covered in Australia (and for that we are truly blessed), you might sometimes need to shell up at first. If it’s dental, then you will give thanks again and again for your emergency fund.
What Not To Do
When setting it up, there are a couple of classic mistakes to make (all of which I have made). Don’t set up your emergency fund account in any way that links it to your general account. It might be called netbank saver but that doesn’t magically mean it will save money for me. Certainly don’t link it to your ATM card, because chances are a Saturday night will qualify as an emergency after a couple of beers. The point of removing it from your reach is so you can only touch it when a true emergency arises.
For one expert, this means job loss, disability, critical medical and death. Other people have a wider range of descriptions, and would use their emergency fund for car repairs and the like. I don’t think that’s necessarily bad, but probably indicates the first stage of an emergency fund.
Once you’ve set up the emergency fund, the money can move towards savings, which will then provide money for anything other than true emergencies. After a while, you would aim to have a couple of emergency funds (provided, of course, you’re not taking away from other financial goals purely for emergency funding).
Maybe an emergency fund, then a fund for maintenance (car and house) and smaller one for gifts. I also am aiming to have a fund that will allow me, primarily as a small business owner, to take advantage of big opportunities that come my way and to have the flexibility to take some calculated risk.
Saving For The Emergency
Generally, experts suggest saving for an emergency fund first- perhaps at the same time as you pay down your debt should you have any. The best way to do so is to track your spending and work out what sustainable cuts you can make, then directly deposit the money into an account far, far, far away from where you can touch it.
Revise your budget after three months, and look for any additional space. Once you’ve hit your major amount, you can decrease your amount and start investing in other assets. There’s no harm in continuing to contribute small amounts throughout your lifetime- it will be an asset that pays again and again.