 For many people, an emergency fund is not their top priority. For young people, it can seem a distant dream. For those who are older, an unlikely need. Working professionals may feel that emergencies can be covered by a credit card or loan, while others rely fully on their insurances to cover them in trying times. What is an emergency fund? We have all had an occasion where a sudden expense caught us off guard. Whether it be an aircon leak, a fender bender, or an unexpected fee, these events can make a decent dent in an underprepared emergency fund or cause major financial strife for those who don’t have one. A well funded emergency fund is an essential part of your financial plan, but it does not exist in a vacuum. Insurances, superannuation, and investments can also form part of this emergency fund, depending on your life stage. How much do I need? This is a question we are commonly asked regarding client’s superannuation balance. How much can I retire on? There is no set “amount” needed for your emergency fund, and it’s hard to give an estimate without knowing your financial situation. For some, your fund will need to cover a range of unexpected expenses that another may not experience themselves. Examples of sudden expenses may include:
For example, renters won’t generally have to account for fixing a broken aircon or replacing rotting floors. If you don’t have dependents, your expenses while you search for a new job could be lower. An emergency fund will be based on your current income and spending habits, but also on your existing superannuation and insurance situation. Insurances, Superannuation, and Investments For most people it is unrealistic to rely solely on an emergency fund. For example, if you are unable to work for long period of time it could take years to save an adequate amount to cover your lost income. This is where life insurance comes in. Personal insurances can protect your income if you are unable to work, reducing the need to rely on savings if you are injured or incapacitated. For those who are older, superannuation lump sums can be used to cover big expenses. Please note that you should always review the impact of these withdrawals on your retirement plan prior to initiating them. Investments in managed funds can provide dividends or lump sum withdrawals which can then be funnelled into unexpected expenses. Again, you should consult a financial adviser prior to making withdrawals as it may have a large impact on your financial plan and stability. That being said, to fully rely on these sources can be risky, and does not cover everyone’s situation perfectly. How do I start my emergency fund? You can start your fund with as little or as much as you’d like. A simple way to start is to add $10 a week to your fund. Place it on an auto transfer to an account designated as your emergency fund. If you think you’ll be tempted to spend it, try using a separate bank without a card. Some banks even allow you to hide accounts so you aren’t tempted to dip into it.  You can experiment with different savings amounts and frequencies here. If you’d like to talk to us about formulating your emergency fund, please feel free to reach out to us.
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