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Do you have an emergency fund? Here’s why you need one

By July 2, 2020August 19th, 2022Uncategorized
Emergency Fund

In the depths of the COVID-19 crisis many people are spending time with that horrible phrase “If Only”. Remember when you spent the last of your cash buffer on that 60 inch all singing all dancing television? You may have been well entertained during lockdown, but for many it would have been better to have had the buffer to dip into in a true emergency. Do you have an emergency fund?

We have been disappointed at the number of people who have felt the need to dip into their superannuation savings to get them through the crisis. There are some who have done so because “they can”, but for others it has been a necessity. Government stimulus has been readily and widely available, and this is a good thing. We see many people living week to week, with no protection should anything go wrong, and go wrong it has – big time!

We see having an emergency fund as an essential part of protecting you from the inevitable shocks which come along. Our approach to income protection insurance is similar. It is a means of protecting your family should you be unable to work due to injury or illness. This would not have helped in the current situation. The only protection you could have provided for yourself and your family was to have available a cash buffer or emergency fund to provide a supplement to your household income at a time when through no fault of your own this is declining.

We accept that trying to rectify this situation is difficult if not impossible now. When planning with our clients, we always recommend creating a buffer for exactly this reason (for an example see here). Financial planning is not all about providing for golden holidays in the sunshine once you retire, it is also about having a plan in place to deal with the unexpected. “Failure to plan is planning to fail” is an overused expression, but perhaps a little truer now than it once was.  We try to help our clients to identify the “What ifs” to help them to avoid the “If only”. For most of us, it is not just ourselves we are responsible to protect, there are others dependent on us. When the unforeseen appears, as it will all too often, it is comforting to know that you have put plans in place.

When things return to normal, if they ever do, a priority for everyone should be to deal with their emergency fund. For those who had one and used it, time to replenish it. For those who didn’t, time to learn the lessons and create one. The following are our six steps to help you get started:

  1. Decide how much you need in your emergency account. What are the basic expenses you need to cover for short period? Is it $1,000, $2,000 or more?
  2. Once you’ve set what your emergency fund should be, open a separate bank account – make it difficult for you to access when it’s not really an ‘emergency’ situation.
  3. Arrange an automatic transfer from your pay to fund your emergency account. Set a date to reach your emergency fund minimum. By then you should be in a routine and not miss the funds coming out of your pay.
  4. If you are having trouble finding the extra funds to build up your emergency fund, consider selling some of your unwanted items. Become friends with eBay, Gumtree or Marketplace,
  5. Use your tax refund to kick-start your emergency fund.
  6. Remain focussed and committed – don’t be tempted to dip into the fund unless it’s really necessary.

Why not give us a call to help you work out how much you need.

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