Emergency Funds: The Ultimate Guide
An emergency fund is money set aside in case of unexpected expenses. So if you experience a reduction in hours or lose your job, have medical or veterinary expenses or urgent car repairs, you’re prepared to deal with it.
It’s insurance for yourself, really - covering your own back in case of a disaster. The Covid pandemic has shown that we are all vulnerable to a sudden change in circumstances.
The Financial Services Council’s 2020 research series surveyed 2000 New Zealanders and reported that if they lost their job the next day, 37.5% could survive for only up to one month while 26.5% would not be at all financially stable. Clearly a lot of us need to sort an emergency fund.
Without an emergency fund, you’re looking at using credit cards or taking out a loan, sinking you into debt that can take years to pay back. Relying on credit cards for emergency use sets you up for a cycle of debt as the interest compounds. This usually sets back your goals of saving for a new home or retirement as most people find it too hard to do both at the same time - the dollars just don’t stretch far enough.
In an emergency, the last thing you need is financial stress. So let’s get some answers to your emergency fund questions.
How much should I have in an emergency fund?
Over at sorted.org, they recommend having $1000 stashed away as a starting point, with the goal that eventually you’ll have 3-6 month of living expenses saved up.
If you’re not sure what 3-6 months of expenses looks like, pull out your bank statements for the past year (or see if your bank has a budgeting tool that does it for you) and tally up your spending. Divide by 12 and multiple by 3 to get a figure for an average 3 months.
Trying to imagine saving 3-6 months of expenses can be really overwhelming and put people off from getting started. So, start with $1000. It gives you a bit of a cushion when an emergency happens and is an achievable goal - we’ll show you how.
How can I save for an emergency fund?
First, let’s put this in realistic terms. If you can put aside $20 a week, you’ll have just over $1,000 after one year. So just one year from now you could be sitting pretty on a tidy emergency fund. Imagine the stress relief!
Then, after you pat yourself on the back, keep adding to it until you have 3-6 months of expenses covered. It will take time, but it will happen if you commit to it.
Everyone can save. It takes an honest look at your finances and a commitment to do what’s best for you in the long-term. It doesn’t have to be that hard - you just have to put things in place and keep the ball rolling.
We’ve put together a list to get you started.
BetterSaver’s Top Tips for Saving:
- Check out 21 Ways to Save Better in 2021 for practical ways you can start saving right now.
- Make a budget. Anyone can do it with our 5 foolproof budgeting techniques.
- Set up automatic transfers to your savings account so you don’t have the opportunity to spend it before you save it.
- Got a tax refund? Win some cash? Bonus at work? Put it in your emergency fund.
- Keep your emergency fund in a separate savings account. Make sure it’s one you can access quickly but not one you’ll likely dip into. Some find it helpful to keep it in a separate bank.
- Consider an emergency pantry as part of your emergency fund! Keeping your pantry stocked with basics can not only help in case of a natural disaster, it can help if you have a sudden expense that eats into your food budget.
Where does KiwiSaver fit in?
Your KiwiSaver account is meant to be long-term savings for retirement or buying your first home. It’s true that there are circumstances in which your KiwiSaver fund can be withdrawn in times of financial hardship. But, you should not rely on your KiwiSaver account as an emergency fund. The criteria for withdrawal are strict and it takes time to go through the process of applying for withdrawal. Plus, you aren’t doing your future self any favours by spending your retirement fund!
Making sure you’re in the best KiwiSaver fund for your circumstances is crucial to getting the most out of your KiwiSaver. Because your fund is invested on your behalf, your money can quietly grow behind the scenes - while you focus on saving that emergency fund and paying down your current debts. Take our fund finder quiz today to quickly find the right fund for you - in less than five minutes you can optimise your KiwiSaver fund.
This is great! But I have more questions…
As with most financial matters, it’s best to seek help from an expert. Meeting with a financial advisor can make a massive difference. They take an unbiased look at your finances and give you specific professional advice to improve your financial situation and meet your goals.
BetterSaver Wants to Help You Save Better
Our vision is to transform Kiwi futures by providing accessible financial advice. Financial advice can change people’s lives and we believe everyone should have equal access.
With over 3 million Kiwis invested in KiwiSaver and a lack of clarity in the industry, we’ve chosen to focus on KiwiSaver advice as a means to affect the most people. Beyond that, we want to make it easy for everyone to be financially literate to have a brighter future.
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