How to Build a Financial Safety Net Before Borrowing in New Zealand?

It’s common to borrow money, whether it’s for a new car, a holiday, or to undertake some home improvements.

But if you’re living paycheque-to-paycheque, without much of a financial buffer, it can be a tricky juggle to manage.

Here is some general information on how you can start to build a financial safety net before you take out a new loan – and why you might want to get into the financial safety net life.

What is a Financial Safety Net?

A financial safety net is also sometimes referred to as an emergency fund.

It’s a sum of money that you have set aside to give you a bit of financial security in case you hit an unexpected expense.

When you have a financial safety net, you’re less likely to need to rely on high-interest debt to get by, reducing your financial stress.

Why a Safety Net Matters Before Borrowing?

When you have a loan to pay back, it’s important that you meet your repayments.

A financial safety net or emergency fund helps you avoid a situation where an unexpected expense might take all your available funds, and mean you can’t make your loan repayment.

It also means you can get through a period where your income drops or your expenses increase without relying on unsuitable debt. As we’ve seen in New Zealand in recent years, costs can rise quickly, and when the labour market isn’t strong, it’s not always easy to replace lost income.

Importantly, having a financial safety net should reduce your stress and give you more confidence about your borrowing decisions.

How Much Should You Save?

When it comes to deciding how much you need, there are a few things to think about.

Many financial commentators suggest it’s a good idea to save an amount that’s equal to three to six months’ worth of your living expenses.

It will depend a lot on your individual circumstances, though. Someone who is single and has more flexibility may not need to save as much as a family with children and other ongoing commitments.

You’ll need to think about how much you need to have to cover your rent or mortgage, your groceries, transport, power, broadband and phone and things like school fees for your children.

If you can’t save a lot to begin with, that’s ok – anything helps! Even having $500 or $1000 saved can make a difference if you hit an unexpected expense.

Step-by-Step: Building a Safety Net in NZ

Here’s a step-by-step guide to getting started.

Step 1: Assess Your Current Finances

• Think about your current income, living expenses and any debts you have.

• You can use budgeting tools, such as Sorted’s, to get a clear picture, so you can plan.

Step 2: Set a Realistic Savings Goal

• You don’t have to get to your goal straight away. You could break your goal into smaller targets, such as $20 or $50 a week.

• Celebrate your success as you go. It might help to visually track your progress, maybe with a chart on the fridge, for example.

Step 3: Choose the Right Account

• Ask your bank or credit union for guidance on your options for a savings account.

• It’s usually appropriate to have your emergency fund somewhere where the money isn’t too difficult to access at short notice.

Step 4: Automate Your Savings

• Make it happen by automating your savings, with a transfer that goes out each payday.

• Paying yourself first means there’s less risk of spending the money you want to save.

Step 5: Free Up Extra Cash

• You may be able to save money to build your fund faster by trimming your spending, maybe hunting for bargains at the supermarket or switching to op shops for your clothes shopping.

• Another option is to try to boost your income. Some people do this by taking on second jobs or side hustles to bring in a bit of extra income.

Balancing Saving with Debt Repayments

If you’re trying to build your emergency fund while also paying down debt, you might be wondering how you’ll juggle both.

If you can, try not to let one be at the expense of the other – both are important for financial security and protection.

If you have high-interest debt, you might aim to pay that down first, and set aside a smaller amount each week to build your fund.

Common Mistakes to Avoid

There are a few things to watch out for.

Using your safety net for non-emergencies

Once you have your financial emergency fund in place, don’t be tempted to raid it. It should be used for real financial emergencies – otherwise, you risk it not being there when you do strike a crisis.

Borrowing more just because you have savings

Having a financial safety net is great for your overall well-being, but don’t let the “wealth effect” tempt you to take on more debt than you really need to.

Delaying borrowing indefinitely while waiting for a “perfect” fund

You might be focused on building your emergency savings, but your life does not need to go on hold. You can still make sensible, considered decisions while you’re building up your safety net.

Frequently Asked Questions (FAQs)

• How quickly should I build a safety net before borrowing?

  Start saving an amount that works for you each week. It’s better to choose an amount you can stick with, rather than trying to build a fund in an unsustainable way.

• Can I still borrow if I don’t have much saved?

  Yes, but it might be a good idea to build up your safety net at the same time, in case of unexpected costs or events in the future.

  When they’re looking at your ability to borrow, lenders will make sure you have enough income to service the debt, as well as your living costs and any other debt costs you have, but an emergency fund will give you extra peace of mind.

• Should I pay off all debt before building a safety net?

  It’s often a good idea to do both at the same time.

• Where are the most suitable places to keep an emergency fund in NZ?

  A bank or credit union account may be an appropriate option, but it may be a good idea to seek personalised advice and independent guidance.

Want to talk about lending?

If you’re getting ready to apply for a personal loan, the team at better finance™ is here to help. We’re experts when it comes to lending and can help with any questions you may have.