How much money should you have in your emergency fund?
Опубликованно 05.09.2020 22:10
Whether it’s for an unexpected loss of a job, bill shock, car accident or medical emergency, having a financial buffer in place is becoming more important than ever.
But how much do you need, exactly?
Experts typically recommend starting out by doing a detailed budget – if you haven’t done one, now is as good a time as any – to calculate all of your expenses.
Then, multiply that by three, six or even 12 months’ worth.
If that’s not possible right away, others say you should try to put away a bare minimum – two American experts last year gave a highly specific number of $US2467.
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“I’m not a fan of one-size-fits-all approaches to savings and spending,” said personal finance expert Melissa Browne from The Money Barre, author of Budgets Don’t Work (but this does).
“I believe there is too much of that in the financial advice world and it can make some of us feel artificially safe.”
Instead, according to Browne, a good rule of thumb is three months’ worth of fixed expenses.
“Things such as rent or mortgage, council rates, loan repayments, internet, phone and other subscriptions, school fees and insurance,” she said.
“The buffer doesn’t need to be inflated for discretionary spending as long as we have a buffer of our needs.”
Browne suggests an easy way to save for your buffer quickly is to lodge your 2020 tax return and “pop the entire refund away towards it”.
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Personal finance expert Melissa Browne.
AMP says it’s crucial to set a realistic target so it doesn’t seem overwhelming – and to get started as soon as possible.
“Having something in your emergency fund, even a few hundred dollars, is better than nothing,” the bank says in its guide.
Once you’ve set a goal and made a start, remember that an emergency fund won’t build itself up.
“Saving for your emergency fund should take into account your income and savings goals, and then look at all the ways you can cut back on your expenses,” AMP says.
“This is where you need to be ruthless, slashing unnecessary spending – your wants, as opposed to your needs.”
For example, if your goal is to save $2000 in six months, that works out to about $11 a day.
“Go through your spreadsheet of expenses and look at all the areas that can be tightened or eliminated completely to make this goal achievable,” AMP says.
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It’s never too late to start an emergency fund. Picture: Supplied
ASIC’s MoneySmart adds that setting up a separate savings account is a good idea as it will discourage you from dipping into the fund.
If you have a mortgage, you should use your offset account – which reduces the amount of interest you pay on your home loan – as your emergency fund to get more bang for your buck.
But when should you actually use your emergency fund?
“Keep your emergency fund for expenses you need to pay quickly when other money isn’t available,” MoneySmart says.
“If it can wait, save up for a few weeks and pay it from this saved money instead.”
National accounts data released Wednesday confirmed Australia’s decades-long run of prosperity has finally come to an end, with the nation entering an official recession for the first time since the 1990s.
The economy contracted 7 per cent through the quarter, marking the worst fall since records began in 1959.
Are you worried about the recession? Do you have an emergency fund? Join the conversation in the comments below.
frank.chung@news.com.au
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