Emergency Funds

The problem with unexpected expenses is that we don’t expect them… or more accurately, we hope them to happen to others, just not us. Whether that is something as small as needing to replace some washers on the kitchen tap, the fridge that we’ve had for years finally packs it in, or fork out cash to cover the excess on a car insurance claim – the issue remains the same, if you don’t expect it to happen to you, you tend not to think you need to set money aside.. because you know, it won’t happen to us.

This is where we tell our clients to ‘plan for the worst and hope for the best’ or, more accurately, when it comes to unexpected expenses; we want them to assume it might happen to them and build an emergency fund just in case – then hope they never need to use it.

What types of unexpected expenses could you find yourself needing to cover?

There is no point preparing for something that doesn’t apply to you, or if you lost it – you wouldn’t need to replace it. So, it would help if you only looked at the types of ‘realistic, unexpected expenses’ that could apply to you. Then ask yourself, “what would happen if?” The car broke down; A significant appliance broke in the house, or at the other end of the severity scale – if I got injured, sick, or lost my job?

If the answer to the question is “I’d go without, or I’d just wait until I saved up enough to replace/fix the lost item,” you don’t need to do much about it. But if the answer is “I’m not sure what I’d do because it would cost more than I have available,” then it’s time to start building your unexpected expenses, aka Emergency Fund.

So how much should I have in my Emergency Fund?

An Emergency Fund is just what it sounds like – a ‘fund’ (usually a Bank Account) that can be accessed quickly and at no meager cost, that has enough money in it to cover the majority of Emergencies that are likely to happen to you.

You’d have a couple of hundred dollars at the absolute minimum. At the maximum, you could be looking at anything up to 6 months or even two years of your income (in case you aren’t eligible for insurance like Income Protection – or if you don’t have these insurances in place).

With our clients, we recommend somewhere between 2 and 3 months’ worth of take-home income (based on the highest income earner). This is because the ‘unexpected expense’ that we believe needs to be prepared for – in case of emergency – is if they were off work due to injury or illness and needed to replace their income during this time.

The added benefit of having 2 to 3 months’ income stored up in an Emergency Fund is that it could also be used in the case of other less financially destructive scenarios, like excess payments on a car or home insurance, or to replace lost or damaged items.

Typically, most Aussies haven’t built up an Emergency Fund yet, so they need to look at other options if using their savings isn’t an option.

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