How to build an emergency fund

When I was a student working part-time hours I couldn’t count on both hands the amount of times I was living week to week. I always figured I didn’t earn enough money to save because I never thought about what I was spending money on. For example:

  • I used to buy a coffee every morning from Starbucks or McDonalds
  • I spent way too much money on takeaway food
  • When I caught up with friends for a drink, I never limited how much I would spend

When an unexpected expense came up, I’d either have to borrow money or max out my credit card. Eventually, when I realised how much money I was wasting, I decided that I had to make some drastic changes. I did a lot of self-research and spoke to a few different financial advisors to change my mentality about money. That’s when I realised the importance of an emergency fund.

If you are someone who has been talking to financial advisors or reading financial blogs, I’m sure you already know what an emergency fund is. For those of you who don’t know, I’ve provided some clarification and outlined how to build a bullet proof emergency fund below.

What is an emergency fund?

An emergency fund is an account where you stash money away in case of unexpected financial expenses or emergencies. An emergency fund will absorb your financial shocks without causing you to dig into your savings or cut back on your day to day living expenses.

What is a financial emergency?

Before looking at what a financial emergency is, let’s look at what a financial emergency isn’t.

Having to buy a last-minute birthday present is not an emergency. Going out to an expensive dinner for your anniversary that you forgot about might seem like an emergency, but I hate to tell you, it isn’t. Buying tickets to see your favourite band or going to see the footy grand final might end up being an awesome time, but it still isn’t an emergency.

Those things should fall under “entertainment” in your budget. If you don’t have money to do it, just don’t do it; trust me, you will be ok.

During this COVID-19 pandemic, a lot of people have lost their jobs and likely won’t find work for a few months.

THIS definitely clarifies as an emergency.

If your car needs to be repaired due to mechanical trouble, you have yourself an emergency. If one of your family members gets sick and the insurance doesn’t cover the expenses, that, my friend, is an emergency. I think you get the gist of it…

How much should you have in your emergency fund?

The answer to this entirely depends on your circumstances. There’s no set amount for an emergency fund. The main aim is that an emergency fund should help you feel comfortable without harming your other savings plans. It depends on factors like how many kids or pets you have and the potential for unexpected dental or vet bills.

Or

If you run your own business, how long might you have to go without a paycheck between contracts?

For most people, a comfortable emergency fund should contain at least 3 to 6 months of living expenses. This means knowing that no matter what happens, you will be financially comfortable while you figure out a plan.

When to start an Emergency Fund

Just because you can’t contribute fully to your emergency fund immediately doesn’t mean that you shouldn’t start doing it. It may take you time to reach the total financial buffer you need but you have to start somewhere.

Always remember that every dollar you put away now is one you won’t need to find when things get tough.

Easiest way to create an Emergency Fund

If you have a monthly budget, you can use this to figure out how much your emergency fund amount should be.

If you don’t, create one right now.

Make sure that you keep the emergency fund separate to the regular savings. You may also want to use a separate bank account to make this distinction clear.

Use your budget to figure out how much you can save per month, then allocate a percentage towards your emergency fund – simple!

Keep it topped up

If you do have to use your emergency fund, make sure you start topping it back up as soon as you can. It’s important to ensure that it’s replenished so you’re always prepared for what’s to come.

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