What Is Emergency Fund and How To Set One Up

More than one in 10 Australians don’t have $2000 in an emergency fund and 20 per cent have missed a bill or loan payment in the past three months. Over 50% of Americans don’t have $1,000 set aside for emergencies. In this emergency fund blog post you will find everything you need to know about how to start your emergency savings account and how to find money to do it.

What is an Emergency Fund?

An emergency fund or emergency savings (EF) is money set aside for unexpected expenses or financial emergencies. Thus, an emergency fund can be used to cover expenses such as medical bills, car repairs, job loss, or other unexpected bills that can require immediate payment.

Basically, the purpose of an EF is to help you manage these unexpected expenses without having to rely on high-interest credit cards or other forms of debt.

If you don’t have an emergency fund set up, don’t worry. I cover all the tips tools and strategies to save money, pay down debt, and set up an emergency fund in my program SUPERCHARGE YOUR SAVINGS & INCOME. ↓↓↓

How much Emergency Fund is enough?

If you don’t have an emergency fund set up, saving up $1,000 is a good start. This is especially true if you are paying off debt to stop you putting unexpected bills back on credit.

READ MORE: How to pay off debt faster

How to save money for an Emergency Fund quickly?

The best way to start an emergency fund? Set up regular, automatic transfers to a separate bank account. $40 a fortnight will help you achieve a $1,000 starter EF in one year.

As you pay down debt or increase your income, you can gradually increase the transfers over time.

The important thing is to start building up your emergency savings as soon as possible. Every amount counts and there are easy ways to save extra money.

Strategies to save money for an EF

My students are saving $165 a week on average. There are lots of ways to cut and save money on cost of living expenses – even when spending money. I’ve been budgeting and finding clever saving strategies for over 10 years. You can LITERALLY copy them! ↓↓↓

How much Emergency Fund should you have?

Generally, it is recommended to have at least 3 months’ worth of living expenses saved for emergencies. Indeed, the ultimate goal is 6 months’ worth of expenses tucked away in an EF.

As a minumum, your EF should include rent or mortgage repayments, bills, food, schooling and transport costs. Basically all your needs. You can go a step further and add some of your wants into your emergency savings goal, too.

FORTNIGHTLY TRANSFER	EF AMOUNT AFTER 1 YEAR
$40	$1,000
$80	$2,000
$195	$5,000
$270	$7,000
$385	$10,000

Example transfer amounts and EF balances after 1 year.

Emergency Fund Calculator

The best way to calculate how much savings you need in your emergency fund? Start a budget to work out your expenses.

Although, the exact amount will vary depending on personal circumstances, your budget will show you EXACTLY how much you need saved for a month’s worth of expenses.

Moreover, creating and sticking to a budget can help you avoid overspending. It also reduces the likelihood of having to dip into your savings for non-emergencies.

GET YOUR BUDGET STARTER CALUCLATOR

How much savings should you have?

Again, the question of how much savings should you have depends on whether you’re saving for a goal or simply looking at savings as an emergency fund. You can start putting money aside for both at the same time.

However, when it comes to savings for other goals (house purchase, holidays, retirement), pay off debt first. Undoubtedly, paying down debt while setting up a starter $1,000 emergency fund should be your first priority. It helps to stop putting unexpected expenses back on credit. Also, debt costs a lot of money in interest.

Unless you invest your savings and get a 10%-20% pa return on your investment (before tax), then you are better off paying off debt first. When it comes to investing, there is also a high level of risk involved. My advice? Only invest the amount of money you are prepared to lose. Yes, this is the worst-case scenario, but it’s a prudent one.

Best Emergency Fund bank account

It can be tempting to dip into an emergency fund for impulse purchases and non-emergency expenses. It’s important to remember that the fund is meant to be used only for unexpected expenses or emergencies. Here are some strategies that can help.

How to stop using Emergency Savings for non-essential expenses

In SUPERCHARGE YOUR SAVINGS & INCOME I recommend keeping your emergency fund in a separate bank account with the following features:

• no instant transfer – look for a bank account that takes 24-48 hours to transfer funds. Basically, this will help limit transfers for impulse purchases. Tips on accessing the money fast for emergencies below.
• high-interest account – if you can, choose a bank account that offers a higher interest rate. This way your money can work for you while sitting there.

Here is my list of the best emergency fund accounts that don’t offer instant transfers:

• Rams Action account
• HSBC everyday savings account
• Any other savings account that does not require a linked everyday transaction account (you can also open a transaction account and cut up the debit card).

Term deposists are also a good option, but it’s a lot harder to access your money from. You will also lose any interest acrued over the term period if you make an early withdrawal.

Access to YOUR Savings

Worried about having no instant access to cash in an emergency? There are ways to combat this.

• Explain the situation – talk to your emergency service provider about your situation and explain your funds are locked up for 48 hours. Then, complete the transfer immediately and send a copy of the receipt to prove payment. In most cases this will be sufficient.
• Use your old credit card – once you clear your credit card, keep it that way and put it in your desk drawer. Additionally, unlink it from your payment services such as phone, watch and others and keep it for emergencies only.
• Get a no-fee credit card – these charge interest from day 1 so you are less likely to put non-essential expenses on credit. If you need to use it for emergencies, transfer the amount used from your emergency fund straight back onto the card. Note that it may take 1-2 days for the funds to clear. This means there will be some interest cost. However, it should be minimal compared to the cost of having instant access to the EF for impulse buys over time.

Is a mortgage offset account good for an Emergency Fund?

A mortgage offset account is a savings account linked to your home loan. Generally, using a mortgage offset account as an emergency fund can be a good strategy.

This way, your EF is actively working to reduce the interest payable on your mortgage. Obviously, this can potentially save you thousands of dollars in interest over the life of your mortgage. This is the method I use.

However, there can be some drawbacks to using a mortgage offset account as an emergency fund. Make sure you check these with your bank first. Firstly, ensure the money is easily accessible. Secondly, check there are no penalties for withdrawing funds or withdrawal limits imposed.

Struggling to save for an Emergency Fund?

Find yourself repeatedly dipping into your emergency fund or struggling to even save for one? It may be a sign that you need to re-evaluate your expenses.

Learn ways save money on 50+ cost of living expenses, set up a no-fail budget with room for an Emergency Fund, pay off debt and find ways to boost your income. ↓↓↓