Perhaps you’re already familiar with the concept of starting an emergency fund, but for those who aren’t, this is the guide for you. It’s a great idea to have funds stashed away for when those unexpected events crop up, so having a few tips and tricks up your sleeve can help you gain the most out of your emergency fund.
What is an emergency fund?
Let’s start by stating the obvious, just to ensure there’s a clear understanding of what exactly an emergency fund is usually used for.
In basic terms, an emergency fund is exactly what it says – money that should be used for emergencies. Picture those unexpected car repairs or urgent medical appointments that can sometimes arise; those are the times you want to tap into your emergency fund1.
How much should you keep in an emergency fund?
As a general recommendation, many financial advisors encourage you to set aside enough money that you could cover about three to six months’ worth of expenses2. It’s important to keep in mind though that this isn’t a rule, just a recommendation – there is no right or wrong answer. The goal is to cater your fund to your personal circumstances, so this will change depending on how much you earn, your recurrent expenses and how much you’re already setting aside for other savings accounts2.
How frequently should you add to your emergency fund?
Just like with the overall amount to keep in your emergency fund, there is no right or wrong amount of money or frequency at which you should be adding to your fund.
A good way to think about this is by planning out how much of your income you already dedicate to expenses and savings. Once you decide on an amount that you feel you can spare for your emergency fund, stick with it for a bit and see how that leaves you feeling. You can always add more or less. The frequency at which you transfer money to your fund will also depend on your personal circumstances. Many often choose to align this with their pay cycle, so give it a go and cater to what suits you1.
Why is an emergency fund a good idea?
Now you’re probably wondering why we keep harping on about an emergency fund. What makes it such a good idea? Unfortunately, life is unpredictable so situations can arise where you need to access a big chunk of money fast, which is where an emergency fund comes in handy. For many, the reassurance you gain from knowing you have money readily accessible when you need it is the real benefit. You can breeze through life with peace of mind that you’ve got yourself covered in case unpredictable circumstances crop up2. Plus, this helps to take away some of the stress and anxiety you may feel when a massive expense falls at your feet unplanned2.
How do you start an emergency fund?
Now you have a solid understanding of what an emergency fund is and when you should use it, let’s breakdown how you can go about starting one.
Start off by comparing the types of savings accounts that are available. Aiming for a high interest savings account is a good idea as it means a little less leg work for you – a portion of the funds in this account will come directly from interest1. Plus, with an account such as Queensland Country Bank’s Bonus Saver, conditions are in place that prevent you from gaining access to the higher interest rate if you withdraw money from the account*. This type of condition can help you avoid the temptation to dip into your emergency fund when it’s unnecessary, ensuring your fund continues to grow1.
Once you’ve decided on an account, settle on an end goal you would like to reach before you access any of the money in your fund. This can then help you decide how much you’ll contribute to it and on what frequency you’ll do this (e.g. weekly, fortnightly or monthly)2. With this in mind, consider setting up an automatic transfer to ensure you never miss a payment and continue to grow your emergency fund1. Make sure you don’t stop contributing to your fund once you’ve reached your goal amount either – after all, going past this goal will only leave you with more money up your sleeve1.
Don’t forget to check back in with your emergency fund on a regular basis – perhaps set a timeline to stick to. It’s important to monitor how much money you’re accumulating in case you need to tap into your fund or if your personal circumstances change and you need to alter the amount you’re contributing to your fund2. The golden rule should be that if you take money out of your emergency fund, make sure you put more in to replace it1.
Last words
While how you use your emergency fund is completely up to you, it’s important to remind yourself that the whole purpose of this fund is to cover you in case unexpected circumstances arise. Keep all of this in mind and you’ll be sure to save yourself some stress the next time something like your car needs major repairs.
*Bonus interest is not earnt in any month where a withdrawal or transfer is made from the account, regardless of whether that transaction is made within the free allowance for that calendar month.
Terms and conditions of Queensland Country Bank’s Bonus Saver apply. Review the relevant TMD available at queenslandcountry.bank. Normal lending criteria, terms, conditions and fees apply and are available on request.
General Advice Warning: This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider the appropriateness of the information provided. In particular, you should seek independent financial advice.
Sources:
1Moneysmart, 2023, Save for an emergency fund, https://moneysmart.gov.au/saving/save-for-an-emergency-fund
2Rhys Brock, 2023, What is an emergency fund?, The Motley Fool, https://www.fool.com.au/definitions/emergency-fund/#:~:text=An%20emergency%20fund%20is%20money,access%20quickly%20in%20an%20emergency