How much should I have in my rainy-day emergency fund?
Unfortunately, too many people fail to set aside emergency or ‘rainy day’ savings to help see you through life’s hiccups. So when an unexpected expense arrives, you find yourself under financial pressure. This pressure can lead to decisions to max out credit cards and apply for expensive short-term loans. And so begins a cycle of falling behind on essential bills and other regular payments.
The Household Financial Comfort Report published by ME Bank in August 2021, found 21 per cent of Australian households had less than $1,000 in cash savings. Additionally, 24% of households reported that if they lost their income, they’d only be able to maintain their current lifestyle for one month, and 11% for just two weeks, which is the equivalent of living life on the financial edge.
How much should be put aside?
As financial professionals, we recommend having emergency savings set aside for life’s unexpected bills. But how do you go about doing this, and just how much money should you set aside for rainy day expenses?
The best place to start is to work out just how much money you have now and what income you can expect to earn over the next twelve months. Against this, determine what your expenses are likely to be, and hopefully, they are less than what you earn. If not, you need to cut back.
Then decide how much you need in an emergency fund. Just how much you set aside will depend on your circumstances. Most experts suggest you should have the equivalent of between three to six months of living expenses set aside.
How can this be achieved?
The best way to achieve this is to break it down into achievable goals. For example, try to set aside an initial goal of $1,000. That means saving $50 a week for around 5 months or going without two takeaway coffees each day. Once you’ve achieved that, try to save a second amount of $1,000, until you reach your goal.
To fast-track this you may look at putting aside your tax refund, or think about selling those things you have sitting around that you no longer need, perhaps even take up a part-time job or side-hustle for a few hours each week and put this money into your emergency fund.
Where to keep these savings?
The next step is to decide where you should keep these savings. Ideally, you want them to be separated from your day-to-day finances but still within easy reach, should you need them in case of emergency.
If you have a home loan, one option may be to establish a mortgage-linked offset account. In doing so, these savings will not attract interest, which would be taxed at your marginal tax rate, but instead will work to reduce the cost of your overall mortgage. Another option is to establish a ‘micro’ savings account. The rules on these vary, but most are based on rounding up every purchase made on a debit card and setting these ‘cents’ aside in a free savings account.
Developing a better understanding of where your money is going and starting to set aside a small amount for your rainy-day emergency fund are the first steps to a better financial future.
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The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.