I was sharing recently how I had one of those weeks! I knocked my cup of tea on the top of my open laptop. Am I the only one that does things like that?? Only a little bit but enough to sound the unfortunate end of my laptop. Though said laptop was over two years old!!
Then later on after getting pizzas and going to a park with the kids, I come home to discover the hot water system had died. I had to tell the kids there would be no baths that night. Surprisingly, the kids coped well with the news.
Yes I was thankful for how quick and easy it was to get a new hot water system installed. Two days later we had hot water again! Though I did think about the benefits of renting as I transferred the $1100 over to pay for it.
Again, I was really thankful for having emergency savings or an emergency fund to cover unexpected expenses such as this.
At the end of the week the laptop was still not functioning so I made do with tiny tablet. Update: A replacement laptop has now been organised. Hurrah!!
Most of us will experience a major negative financial event or two or three in our lives sometime in the next 10 years.
As I experienced recently, an emergency fund gives you financial peace and security. It also enables you to act more quickly in an emergency and importantly protect you from getting into unnecessary debt.
What is an emergency fund?
An emergency fund is commonly known as cash that you’ve saved up for the sole purpose of helping you maintain your normal lifestyle through the emergencies or unexpected expenses that can happen in life. These savings can be used to pay for unexpected expenses such as car repairs, medical expenses, a death in the family or hardship resulting from unemployment.
Or as Aussie Scott Pape aka the Barefoot Investor calls it, a Mojo Bucket to provide ‘safety money’. Differentiated from splurge or blow money! For example, a trip to Bali because Jetstar has flights onsale is not considered an emergency.
How large should my emergency fund be?
It is generally recommended that an emergency fund be able to cover 3 months of living expenses, though Suze Orman of Financial Solutions for You suggests 8 months. The exact amount will vary depending on your circumstances. For example, whether you are renting or paying off a mortgage, have dependents or don’t have any.
Ok you’ve worked out how much 3 months of living expenses is for your household and that seems way too hard to save that much!!
So how can I get started?
The key is to start small!
Set a goal for anything from $500 to $2000 and put aside a regular amount of $100, $50 or even $25 from your current living expenses. The easiest way is to set up an automatic transfer from your everyday bank account to a separate savings account on a fortnightly or monthly basis.
Don’t touch the money! While it may be tempting to use the money to splurge with, set aside a splurge fund for those purchases instead.
Honestly, I am still in the process of saving towards 3 months worth of living expenses (kids and a house cost a bit!). After using my emergency fund for the replacement of the gas hot water system, I need to re-focus my efforts on replacing those savings. Plus, continuing to add to it.
Where is it best to keep my emergency fund savings?
Most of the time it is better to set up a separate high interest savings account. Name it “My Emergency Fund” or something similar.
I choose to have my emergency fund account with another bank. Also I don’t have a debit card for it so this makes it slightly more tricky to access the money.
Some people may choose to keep it in a home loan offset account to reduce the interest payments on their mortgage.
Let me say, whatever your income level, it makes a difference to your happiness to set aside an amount of savings for an emergency fund!!
I would love to know whether you have an emergency fund or not. Leave me a comment below!!