The ABCs of Emergency Funds: Building Your Financial Safety Net

When you think of the steps you might take towards being financially comfortable, you might think about setting up an investment, or trying to get a pay rise. But what about setting up an emergency fund? 

An emergency fund is a savings account that has enough money to cover you for a period of time, maybe three to six months, in case something happens that disrupts your normal financial life. It can also be tapped into for things like car repairs or other unexpected expenses. 

The big benefit of having an emergency fund is that it means it’s less likely you’ll have to turn to debt to get you through – so you can keep focusing on getting ahead, no matter what happens. 

Here’s the ABC of what you need to know. 

A – Assess 

 
The first thing you’ll probably want to think about is how much money you need to have in your emergency fund. Some people advise to aim for six months’ of income, but others think three is more achievable and sufficient. Still others think it’s more important to have money set aside that is enough to cover the basic expenses that you could not cut back on if you had to. 

For a start, work out how much you can afford to put aside each time you’re paid, and work back from there to determine how long you’re likely to be saving before you get to a reasonable amount. Once you hit your target, you can stop and move that money you were saving to a different goal. 

It might help to start with a small aim – maybe one month’s expenses. Then, when you hit that, you could focus on something else for a while before returning to build the fund up to two months, then three months.  

B – Bank account 

You might then think about where you want to have your emergency fund. Generally, it’s often recommended that you keep the money in a bank savings account. It often won’t give much of a return but it means that the money is available when you need it, and you don’t have to wait to access it.  Considering it’s designed for unexpected emergencies, that may make sense.  

If you have a mortgage, you could look at whether an offset account might be an option, or a revolving credit facility, if you’re financially disciplined.  

C – Control the urge to tap into it 

Remember, your emergency fund is there to help you on a rainy day, not to be raided when you find you’re a little short for a purchase you’d like to make. The key to an emergency fund is to have it sitting in the background as reassurance and a backstop – not as part of your day-to-day financial life. If you do have to tap into it, replace the money as soon as you can and then get back to ignoring it again. 

There are lots of benefits to having an emergency fund. As well as avoiding debt, it’ll also give you the peace of mind that you’re protected and can then use or save other money you have available however you like.  

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Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.