First of all, savings are savings – we cannot discriminate between different types of savings because we know the blood, sweat and tears it takes to just save! But just as you might separate your daily spending account, your money for bills and your solid savings, it might also help to divvy up your savings.
By categorising your savings, you can keep the solid majority of your money to move towards your big financial goals. But the reality of life is that problems always occur or issues always crop up – from a busted car tyre to a sudden need for your wisdom teeth to be removed. You shouldn’t feel a wave of remorse when these things occur and you need to dig into your savings, pushing you further back from your goals.
That’s where an ‘emergency fund’ comes in. An emergency fund is just a small buffer between you and chaos. It’s not for rainy day splurge spending on that new set of golf clubs – as the name details, it’s more for putting out spot fires as they crop up. Establishing an emergency fund can really free you from the financial stress of “what ifs” and allow you to focus on your real long-term goals.
So here’s how to establish your emergency fund:
Find your number
If your greatest fear is being out of work for three months, maybe you’ll want to set aside three months worth of expenses? Maybe your car is getting old and you see a big mechanic bill in your future? Or maybe you can’t really foresee any surprise expenses getting above $2,000? Whatever number you think is appropriate for your lifestyle – set it as your emergency fund.
Set up an account
Find a low-fee or no-fee savings account with a great interest rate that you can open, preferably just an online account that doesn’t offer a card. This way you won’t be tempted to dive into your emergency fund on Friday night drinks.’ There’s also something to be said for ‘out of sight, out of mind’ so if the account isn’t linked to your everyday spending, you’ll be less likely to dip into it.
$2,000 is a reasonable amount for an emergency fund and when you really think about it, if you sold those unused surfboards or freelanced for a month on the side, you could probably achieve it. If you’re not in the decluttering mood, you could set up an automatic tip to your emergency fund account of 10% of your income. Progressively, this will help you reach your target number.
Come what may, Life, because we’ve got emergency funds!
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.