Emergency Funds: Insights and Tips from Grace Bacon

What is an emergency fund?

An emergency fund or a ‘rainy day bucket’ is a financial safety net that will cover unexpected expenses or financial emergencies that may occur.

How much should you have in an emergency fund?

The amount you have in an emergency fund will depend on your personal circumstances - consider some possible scenarios that may require you access funds above and beyond your regular expenses. 

An emergency fund can help provide peace of mind and financial security in case of unforeseen events such as job less, medical emergencies, or home repairs.

What would you say to people who might look at ‘three to six months worth’ (that’s generally what finance experts recommend) and think ‘how on earth could I save that much’? What would you recommend they do? How much should they save? E.g is it just as much as they can put away even it’s $5 a week…

Consider what you are willing to give up or sacrifice on a daily, weekly or monthly basis where it won’t impact your ‘joy’ in life too much. It’s about setting a budget you can afford to set aside and sticking to it. 

I recommend people start small and create a habit of saving, often you are quite surprised at how quickly you can accumulate your savings.

Where’s the best place to put your emergency fund?

A high interest savings account or an investment where it’s not easily accessible or has a penalty can act as an incentive to not access the funds.

If you have a mortgage, you can use your loan offset account. 

Credit cards can also be used for emergency funding but be aware of the high interest rates you may incur if you do not pay off the balance at the end of the month.

Is setting up automatic transfers a good idea?

Automatic transfers are absolutely a good idea! What you cannot see in your bank account, you don’t feel it. I recommend setting up a direct transfer to your emergency fund as soon as you get paid.

What about for people who have no spare cash to put away? How could they make some money to start building up an emergency fund, e.g. sell unwanted items etc.

With the increased acceptance of a shared economy and a focus on being environmentally conscious, selling unwanted items via online marketplaces can assist with getting rid of clutter and also raise some emergency cash. Someone’s trash is another person’s treasure and it creates the added benefit of recycling and reducing waste.

Hobbies are another way to raise funds and many successful businesses first started as a side hustle. Etsy has become hugely popular for people looking to sell their homemade creations.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.

Grace Bacon is a Director of RSM Financial Services Australia (AFSL 238 282), advising clients on wealth management, retirement planning and succession planning. 
If you have any further questions, reach out to Grace or your local RSM financial adviser.

This article first appeared in the Sydney Morning Herald, The Age and Brisbane Times.