Emergencies often occur in the most inconvenient times. And while we can’t tell when a crisis would happen, we can always free ourselves from stress and worries with an emergency fund. This guide has the steps and tips you need to start setting up one.
Why Set Up an Emergency Fund
An emergency fund acts as your safety net for unexpected costs like losing a job, home or car repairs and medical bills. These savings will help you tide over emergencies and prevent you from resorting to borrowing options with high interest. An emergency fund also keeps you away from unnecessary debts.
A 2019 study by AMP Bank concluded that 1 in 5 Australians do not allocate a part of their monthly income for savings. Among the respondents, 31% have less than AUD$1000 in savings. These findings further stress the need to study our expenses and apply money-saving tips to our household.
Steps to Start Saving for an Emergency Fund
Our daily expenditures, from food to utility bills to school fees, often limit our abilities to save. But then again, there’s always a way to set aside even a small amount. Just remember that if you want to start saving, make it a habit. Setting aside $20 a week, for example, can give you more than a thousand dollars of savings in a year. And that’s a good start. Here are a few more steps to help keep you going.
1. Create a budget
How much do I need to save for my emergency fund? Ideally, your emergency savings should be enough to cover about 3 months’ worth of expenses. To start saving, you need to create a budget. One way to do this is to follow the 50/30/20 budgeting rule, where 50% of your income goes to living essentials, 30% to discretionary spending and 20% to savings, investments or debt reduction.
2. Set up a savings account
Once you start saving, make sure to put it in a savings account. There are three essential factors to consider when setting one up for your emergency fund:
- It should be separate. Separating your savings from your main bank account helps you avoid dipping into your nest egg. Remember that an emergency fund is for emergencies only and, as much as possible, should be used until necessary.
- It should be accessible. It’s best to choose a liquid bank account for your emergency savings. This way, you can easily withdraw the money when you have to.
- It should have a competitive interest rate. This factor will quickly build your savings. So, make sure to choose an account with minimal or no added fees plus good base and bonus interest rates.
3. Choose to automate transfers
To make saving less time consuming, choose a set-and-forget system that works for you. For example, you can apply for an automatic transfer from your payroll account to your emergency fund. You can also ask the help of your payroll or finance department to automatically deduct a certain amount from your wage and transfer it directly to your emergency savings account. Aside from saving time, this strategy also helps you save quickly and consistently.
4. Find ways to boost your savings
If you think your income is not enough to set up an emergency fund, perhaps changes on how you earn or spend can help. You might find these money-saving tips useful:
- Cut costs. Overspending on items like expensive travel, night outs, food takeaways or monthly subscriptions can hamper your saving ability. Try to assess the luxury items that you can do without or find a low-cost alternative. For instance, make coffee at home than buy one at the café, give backpacking and budget travel packages a go or limit your food takeaways to twice a month. A small amount saved goes a long way.
- Settle debts. This one is yet another major roadblock to your emergency fund And if you’re struggling with several debt payments, consider debt consolidation. This way, you can settle debts in one payment at low interest. Having a credit card with low rates and fees is another option. When settled, it is good practice to avoid getting into one again.
- Earn extra income. A side hustle is a smart way to earn and, eventually, save more. Did you know that about 7% of working Australians have used digital systems for work? Check out this article for work from home ideas, so you, too, can turn extra time into extra cash.
5. Continue saving
After reaching your emergency fund goal, you don’t have to stop the saving habit. Find more reasons to save, be it for college education, new home or retirement. Look for investment opportunities that can give you better returns. And if you need to dip into your emergency savings, make sure to top it up again. After all, it’s always best to prepare for a rainy day!