In today’s tough economic climate maintaining an emergency fund that will protect you against accidents and minor financial emergencies is essential. An emergency fund must be easily accessible, and highly-liquid. Emergency funds should not consist of volatile investments, like stocks, but should simply be money set aside in either your normal savings/checking account, or a separate savings account.
What is an Emergency Fund?
Sometimes things go wrong. Your clothing washing machine could break, you might find yourself out of a job, or you could suffer from numerous other problems that cause you to take a financial hit. These events will cause stress, no matter what, but by being prepared and establishing an emergency fund you can protect yourself against minor financial disasters. An emergency fund is money you set aside to cover financial emergencies.
Emergency funds must be easily accessible. In the event of an emergency you will likely need to get access to your money quickly, often within 24 hours or less. Thus emergency funds should not consist of stocks, bonds, or anything else that must be sold in order to get cash. In fact, emergency funds should consist purely of cash and its best to make sure that your fund can be accessed through an ATM machine. Just setting aside extra money in your normal savings/checking account is fine, though some people opt to establish a separate account.
Do you need an Emergency Fund?
First thing is first, you need to establish an emergency fund. You should make sure you have a fund to pay for emergencies, should they arise. If your car’s transmission fails, you may find yourself having to foot a AU$ 2,000 bill or more to get your car running again. And given that you may need your car to get to work and back, not having funds to pay for a break down could have dire results.
There are numerous other potential emergencies that could arise. While establishing your emergency fund you should write down all of the potential problems that could take place. What would happen if the water heater in your home broke? What if your computer breaks, would it need to be replaced right away? Do you have enough money on hand to cover these events?
How Big Should Your Emergency Fund Be?
You should figure out the three most expensive potential emergencies that have a reasonably high potential of occurring and then set aside enough money to cover all three emergencies at once. As the old saying goes, when it rains it pours, so you should make sure you have enough money set aside for a few rainy days. Given that most expensive emergencies will likely cost somewhere around AU$ 2,000, having 5 to 6K in your emergency fund would be a wise idea. At the very least you should keep A$4,000 in your bank account.
If your current amount of savings in your emergency fund is not enough to cover the expenses of the current emergency, use cash loans as a last resort. Cash loans (and especially cash loans for bad credit) incur an interest rate that can be relatively high. Try other methods of getting cash help such as borrowing from family and friends prior to resorting to loans or credit cards.
The Limits of an Emergency Fund
Remember, as emergency fund is only for unexpected accidents and other similar emergencies. Emergency funds are generally not built to guard against unemployment, or other long-term problems (though can and should build separate funds to cover these types of events). Emergency funds will help reduce the financial stress of emergencies as they arise. This in turn helps you handle each developing emergency and helps keep stress levels low.