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I’ve been reading a lot about emergency funds lately. Apparently it’s one of the building blocks of a really good financial plan.

It was a relatively new concept to me. But given I have funds stashed away for a rainy day, maybe it’s just the label that is new!

What is an emergency fund?

An emergency fund is an account or amount that you have for “emergencies”.

The concept of an emergency fund comes from the premise that everybody is somewhat vulnerable to job loss and uncertainty with their income. This type of fund is a little different to the everyday emergencies, those unexpected expenses and the normal ups and downs of living.

The idea is that when the funds are flowing in, some of these should be put aside for that day when the funds aren’t flowing in. Different to superannuation which is accessible in retirement, an emergency fund is for when the chips are down and there is nowhere else to go. You have bills to pay, hungry bellies to fill and the money has to come from somewhere.

Once you’ve built your emergency fund up its pretty much set and forget (hopefully on a good interest rate). If life is good to you and you don’t touch it, it’s a nice little addition to your retirement income.

Of course it’s also important to have the income or a fund for other unexpected expenses when they arise. The reality is, if the money is in your emergency fund you can use it and top it back up as soon as you can. Alternatively have another account for unexpected expenses, as they tend to keep arising (at least in my household!).

How much should I have in an emergency fund?

That really depends on what works for you. Maybe a bit on who you listen to. I’ve heard suggestions from one month’s salary through to one year. There are a few things to consider that might help you decide what is best for you.

  • How much do you spend on living each month?
  • How long would it take you to find a new job?
  • Do you have income protection and any other risk insurance products?
  • What are your essential expenses and what could you cut out if money was short?

Understanding your budget will help

By understanding your essential living expenses without all the luxuries and lifestyle choices on top, you may shave an amount off the figure you decide to aim for.

If you decide you want to save six month’s salary, you may decide to work out your “essential budget” and save six months of that instead.

Do you have an emergency fund? Please share in the comments below.

Image courtesy of Shutterstock.com

  • always a very sensible idea to have savings. you can’t predict or control the future and this could help you out!

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  • Definitely is something worth considering, thanks.

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  • This is a fantastic idea. I don’t have an emergency fund at the moment but I usually have some savings set aside.

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  • We used to have a great fund put aside but it’s been used up and we can’t seem to get it going again

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  • As you’ve said, it depends who you listen to as to how much you save. We’ve always had an emergency fund in one form or another, and although of late the bottom of the barrel is rather dry, I know even putting aside $2 from a good week means 2 litres of milk there when I need it most.

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  • What a great idea, i have to get better at saving though :)

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  • I find that with bills there is never enough money left for an emergency fund.

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  • i need an emergency fund, so I will be getting on top of that real soon – thank you for providing easy to understand articles on how to be smarter financially without all the confusion that a financial planner gives

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  • I have no emergency funds as I live only on a disabled pension & I’m still paying off my mortgage, plus I’m struggling already to cover my expenses due to the rapidly rising costs of electricity & living expenses in general. As well my medical expenses have increased lately as my health is getting worse so I need to pay for more medications & as I live in a rural area I have to pay for someone to take me to my Dr regularly & to all the specialists I need to see now (& rural patients on a pension card don’t have free access to all specialist & the tests they order like those in the city).

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  • Yes, I do have a bank account that I consider our savings. It’s what I would call our Emergency Fund for bigger bills, holidays, etc. I also have a slush fund where we’ve put aside money that we want to build up a bit that we don’t touch or draw from.

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  • Yep, always good to have money for emergencies !

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  • Have always done this – it is great to have a good budget as well.

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  • Yep – got to have a rainy day/emergency fund – even a little one.


    • Good idea to factor a fund into a budget.

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  • Money for a “rainy day”. Repair or replacement for things such as refrigerator, washing machine, a rainwater tank that catches all the water off your house, or you are going to get flooded if you get heavy rain.

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  • A lot of people are well stretched and unable to build any such funds with the current job situations. More redundancies every day.

    Reply

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