Managing your budget can be stressful, especially if you have an unexpected financial event occur. Life can be unpredictable and sometimes it’s difficult to know where it will take you. If your car breaks down, you have a stint in the hospital or you lose your job – do you have a financial plan? According to the Australian Securities and Investments Commission, only 46% of Australians have a rainy day fund. If you dismiss saving for emergency purposes, if something goes wrong, you could end up being in more debt than you were before.
An emergency fund covers you in the event of an unexpected financial blow and can help prevent you from going into debt. Building an emergency fund takes time and dedication. While it won’t solve all of your money problems, it’s a great start to getting your finances moving in the right direction. Here are our tips on how to build and manage an emergency fund.
The Benefits of Building an Emergency Fund
Everyone is likely to face at least a few financial emergencies in their life. An emergency fund lessens the blow when something goes wrong. An emergency fund can help:
1. Reduce Your Stress Levels
When an unexpected expense catches you off guard, it’s likely your financial wellbeing is impacted and stress levels rise. Having an emergency fund gives you peace of mind in knowing you can afford to pay for the emergency – without the added stress.
2. Avoid Taking on More Debt
If you don’t have an emergency fund when the unexpected occurs, you’ll have to resort to credit such as a personal loan or credit card. A credit card or personal loan will only increase in cost each month with high interest rates and fees. An emergency fund allows you to pay for these extra expenses without having to take out a line of credit.
3. Help You Get Approved for a Home Loan
While a good credit score is a big factor in being approved for a home loan, it’s important to understand a lender will take a look at your finances when deciding whether to approve a loan. This includes your daily spending habits, debts and even your coffee and Afterpay purchases. Liquid assets, such as savings (in this case, your emergency fund) can help reassure a lender that you’ll be able to keep up with repayments even if you were to experience a sudden financial downturn such as losing your job. Having liquid assets could also lower your risk status as well as the interest rate you may be offered on the loan.
How Much Should You Have in an Emergency Fund?
There is no set amount required for an emergency fund and everyone’s balance will be different depending on their circumstances. When building your emergency fund, it’s important to think about the following:
- Dental, medical and school expenses if you have children,
- Unexpected vet expenses if you have pets,
- Emergency car repairs,
- Long-term illness,
- How you will budget if you are a contractor or work odd hours, and
- If you experience a job loss.
On average, it’s best to aim for between three to six months of your total living expenses. No matter what happens, you should have enough money in your emergency fund to cover the costs for this period while you work out a plan moving forward.
Tips to Building an Emergency Fund
1. Put Aside Emergency Fund Money First
Instead of waiting to see how much money you have left over after payday, it’s important to put money into your emergency fund at the start of each month or payday.
2. Automate Your Savings
By setting up an automatic transfer into your emergency fund at the start of each month (or each payday), you limit any likelihood you’ll forget to transfer the money to your emergency fund or use it for something else.
3. Make Use of Windfalls
If you get money for Christmas, receive your tax return or win the lottery, put this money towards your emergency fund. A little extra windfall will help you get closer to your emergency fund goal.
4. Cut Expenses
Take a look at your budget and see where you can free up some extra cash. It could be an unused gym membership, cutting back on takeout food or a daily store-bought coffee. Every bit counts towards building your emergency fund.
Struggling with Debt?
If you’ve experienced an unexpected financial event and are having trouble with debt, Debt Rescue can assist. We can help get your finances back on track with debt consolidation, a mortgage refinance, informal Debtstroyer Agreement, Part 9 Debt Agreement or Bankruptcy. Get in touch with our experienced team today on 1800 560 579 so we can assess your financial situation and recommend the best debt relief solution for your needs.