Do you have an emergency fund? Yes, that’s right, an emergency fund; a pool of cash that can be easily accessed in the event of an emergency. (No, your parents don’t count!) Why do I ask? Well, I have recently been reading some research suggesting that 40% of us can’t even raise $750 without going into debt. If so, it would suggest that many of us are living in a precarious state financially and at the mercy of short-term lenders.

Why would I need an emergency fund?

The most obvious reason for an emergency fund is to avoid going into debt. It guarantee’s you the ability to alleviate those sudden costs in life without you going “cap in hand” to relatives, friends or finance providers.

The idea of an emergency fund is to store at least six months of net income in an easily accessible account. Always ready to be used for those predictably unpredictable mishaps in daily life. For example

1. You suddenly find yourself out of work. It can happen and without warning.
2. You can’t shake that cough. After two bottles of Benadryl, it’s time to see a doctor, and then maybe another and then possibly a specialist. Don’t have income protection insurance; at least you can draw on your emergency fund to keep the mortgage paid.
3. Someone close passes away. Money is at its most superficial when a loved one passes. But you still need to travel interstate for the funeral, and an emergency fund keeps the expenses off your credit card.
4. Your roof suddenly starts leaking? Or that small noise in your plumbing suddenly turns deafening. Maybe your fridge has decided to ‘defrost’ itself while you’re at work. I think you know what I mean!
5. Your car suddenly develops a funny grinding noise. All of a sudden your ability to get around has disappeared. Public transport isn’t an option, and you have to drop the kids at training four nights a week. Thank you, emergency fund, because I don’t need to go into debt to get out of this pickle.

• As a pet owner myself, need I say any more about the extraordinary vet expenses that suddenly pop up! And you thought it was just a fur ball!

So where do I put the money saved for my emergency fund?

As emergency funds are just that, needed for an unexpected emergency, an “at call” bank account is the way to go. Don’t consider the funds as an investment, but rather as money to be spent the minute a problem crops up. Your ability to access the funds almost immediately is the paramount criteria when choosing an account.

The interest rate being offered is secondary to ease of access. By the way, your friendly bank officer may advise you to use a term deposit which can be broken if required. Just make sure there are no penalties, fees or special circumstances applying, if you can’t be certain, stick to the standard savings account.

Make sure you keep your emergency funds separate from your savings. I know the difficulty in accumulating cash, and how easy it is to blow your emergency fund on a weekend away at a winery or similar “emergency”!

To create your emergency fund won’t be easy. You have limited cash flow, which no doubt is nearly always fully spent. It also requires you to think differently about how you fund your lifestyle. For most of us, credit cards provide a convenient stop-gap during an emergency and non-emergency times alike.

Unfortunately, their convenience comes at a price, an extraordinarily high-interest rate. Their use also guarantees you are spending above your means. This is always a recipe for disaster, no matter how you currently manage them.

One way to start your fund is with a windfall. This could be a tax refund, a bonus from work or an in- heritance to name a few. If you are fortunate to get hold of a lump sum, put it away as the foundation of your new emergency fund.

There are also many money saving tips you can employ. Some of the more ubiquitous ones such as stopping the daily coffee and taking your lunch to work will do the trick. But for success, you actually need to isolate the cash savings and then deposit them into your emergency account. There is a big difference between thinking you are saving money and actually saving money.

By the way, a method that has been very successful for me over the years is to just put all your loose change into a sealed money box. When it’s full, deposit it to your emergency account and you’re off. Yes I know, coins are not as commonly used these days, but they are still available, You just need to change how you go about paying for stuff (get it, change how you pay!!) I have a post about saving money and it has some useful tips, so check it out for some ideas.

Setting up an emergency fund is a great way to start getting on top of your finances. It will take time to organise but will be well worth the effort.

Thanks for reading and see you again. Homepage.