An emergency fund is an amount of money set aside solely for the purpose of covering life’s emergencies. Having an emergency fund is a key part of your money management plan.
These emergencies can include medical events, sudden job loss, repairs to cars and home appliances and basically anything else you wouldn’t make a line item for in your regular budget.
For someone who isn’t great with money (no shame, I used to be terrible with money), it means they can sleep soundly and not be worried about incurring expensive consumer debt (credit cards, personal loans or payday loans) when something out of the ordinary happens.
An emergency fund can make all the difference when a financial crisis hits.
It’s the money you use when your washing machine stops spinning on the first day of school holidays. It’s the reason you can say yes to visiting a sick relative and not worrying about taking unpaid leave.
An emergency fund has your back when life happens.
How much money should you have in an emergency fund?
The ultimate goal is to be able to cover 3-6 months worth of expenses.
This will buy you enough time to sort out either another job or figure out how to access social assistance from your government.
If that number seems overwhelming, remember this amount could take a while to save and it’s better to have something rather than nothing.
Is a $1000 emergency fund enough?
Saving a $1000 emergency fund is a more manageable goal for most people, especially if you are struggling with money as it is.
Lots of finance gurus advocate a $1000 emergency fund, and whilst it’s a good start, it’s not enough to keep a roof over your head for any amount of time if you live in Australia or New Zealand.
Where should I put money in an emergency fund?
Your emergency fund should be totally liquid – that means you can access it immediately when you need it. If you have a mortgage, look into getting an offset account