How to Set Up an Emergency Fund in NZ’s Cost-of-Living Climate

The cost of living has put pressure on lots of households in New Zealand in recent years.

Although inflation has subsided from its post-COVID highs, prices are still rising quickly for lots of household essentials, such as milk, butter and cheese.

When the pressure is on, an emergency fund can be more important than ever, giving you peace of mind that you can cope with unexpected expenses.

But recent research showed 44 percent of New Zealanders don’t have one.

Here’s why that matters, and what you can do to put a fund in place if you’re one of them.

What is an Emergency Fund?

An emergency fund is money that you keep aside to help out in an emergency.

Usually, this is kept in a separate savings account, although some people also opt to have the money available in a home loan revolving credit account. The right solution for you will depend on your overall financial picture.

When you have an emergency fund, you can turn to it when you have an unexpected expense or a hit to your income. Maybe you are temporarily off work and have no sick leave left, for example, or you have urgent repairs to be done to your car that you need to cover.

The emergency fund means you do not have to rely on potentially expensive credit cards or other loans to cover these costs.

Why Kiwis Need an Emergency Fund Now?

Life has got more expensive, which means many people are having to manage their budgets a bit more carefully.

This could mean you have less leeway to cover an unexpected expense. Knowing you have an emergency fund available if it’s needed could offer invaluable peace of mind.

The Retirement Commission’s research showed that people with an emergency fund were much more likely to feel more optimistic and confident about the future and much less likely to be concerned about their finances from one pay day to the next.

How Much Should Your Emergency Fund Be?

In general, people are often advised that they should have an amount saved that is equal to three to six months of their living expenses.

But it’s most important to think about what’s suitable for your situation.

Someone who is single and not responsible for anyone else’s living costs, for example, might need less of a financial buffer than someone who is providing the only income for a household with other adults and children.

Deciding what’s necessary for you could involve thinking about things like:

• What other income would you have in your household if you couldn’t work?

• What bills would you be able to reduce?

• What expenses would remain constant?

• If you lost your job, how long are you likely to need to find another?

• What insurance do you have in place?

• How much room is there in your weekly budget to cover an unexpected expense, such as a car repair?

Step-by-Step: Setting Up Your Emergency Fund

If you’re ready to get going with your emergency fund, there are a few steps to work through.

Step 1: Assess Your Expenses

Make a list of the essentials that you pay for each month. What do you have to cover in rent or mortgage costs? How much is your food bill? What about electricity, phone and broadband? What does your insurance cost? Are there other costs for education or childcare?

Stats NZ data shows the average weekly expenditure for households in New Zealand for the year ending June 2023 was $1,598 – but there can be a lot of variation with the average, and many households spend more than 40 percent of their income just on housing.

Step 2: Set a Realistic Savings Goal

Then, you’ll need to start putting money aside to build your emergency fund.

It might help not to start thinking about the need for three to six months’ worth of income at the outset – even if you can only start small and build from there. Anything is better than nothing.

Step 3: Choose the Right Account

You’ll need to decide where you want to save the money.

Things to take into account include the interest you might earn on your savings, the fees that could be charged and how easy you want it to be to access. Some people like to have their savings account visible alongside their online banking, but others prefer to have it a bit removed so it’s not so easy to tap into!

If you have a home loan, options could include offsetting your savings or using a revolving credit facility, depending on your situation.

Step 4: Automate Your Savings

Pay yourself first to build your savings account.

It may be easier to build up savings if you set up an automatic transfer to put your money into the account shortly after each payday, so that you don’t have to think about it.

Step 5: Build Consistency with Small Wins

You don’t have to reach your savings goal immediately.

Celebrate your milestones along the way to stay motivated, and chat to friends and family about what you’re doing.

Tips for Saving on a Tight Budget

A savings account can be particularly useful when your budget is tight – but sometimes that’s the hardest time to save.

Here are some things that might help.

• Meal plan: If you draw up a plan at the start of the week for your meals, it can help you shop carefully to get what you need. This can reduce the likelihood of you buying things that won’t be used, and means you won’t have to keep going to the supermarket, where you might be tempted to spend more!

• Make the most of loyalty programmes: You might be able to save money on your spending by signing up for loyalty programmes. As long as you’re using these for spending you’d have done anyway, it can be a win-win.

• Boost your income: If you have any skills that you might be able to monetise, you could set up a small home business. Some people earn some extra money by taking on some extra “gig economy” work, or even by selling things they no longer need.

• Keep an eye on your debt: Don’t get into debt just so that you can build your savings account.

Common Mistakes to Avoid

There are a few things that could catch you out.

• Dipping into the fund for non-emergencies: Your emergency fund should be for emergencies. Don’t be tempted to raid it for day-to-day expenses. This might be a sign that your budget needs a rethink.

• Neglecting to adjust the fund as circumstances change: Your emergency fund should reflect the reality of your current circumstances. If your household has changed, or you have new obligations, your savings might need to be bumped up.

• Keeping the fund in an account that’s not earning interest: If you’ve built up a sizeable amount in savings, it usually makes sense to try to earn interest on that.

FAQs About Emergency Funds in NZ

• How quickly should I aim to reach my goal?

  There’s no one right answer. It may make sense to put together a budget and work out what is feasible. If you try to get there too quickly, you could find that you can’t keep up with other aspects of your financial life.  But if you’re too slow, you might lose momentum.

• Can I use KiwiSaver as an emergency fund?

  There are rules around withdrawing money from KiwiSaver. If you want to withdraw on hardship grounds, you need to meet strict hardship criteria. An emergency fund gives you an option to fall back on before things get that tough.

• What if I have debt—should I still build an emergency fund?

  If you have high-interest debt, it may make sense to pay this off before you start building your emergency fund.

Do you have questions about your loans?

If you’re getting your financial life sorted, you might have questions about any debt you have.

We can help you look at whether debt consolidation could be an option for you, how your current loans are performing and what you might need in the future.

The team at better finance™ is an expert when it comes to personal loans, and we are here to help.