Building Your Safety Net: A Practical Guide to Emergency Funds

Building Your Safety Net: A Practical Guide to Emergency Funds

An emergency fund is an amount of money that you have saved in advance to cover any urgent or unforeseen costs, for example, needing to fix your car, losing your job, or becoming unwell for an extended period (I hope that never happens though). It’s your safety net so that you’re prepared and don’t need to worry about borrowing funds if lady luck turns against you.

Personal Story: My Wake-Up Call

Nobody likes to be caught off guard with unforeseen costs, especially when you have not prepared for it. In my case, what triggered this post was that my washing machine broke last week, and it was just out of warranty (don’t you hate it when that happens). I was short on the funds on this occasion because a friend came to visit for 2 weeks, and I ended up spending more than expected and dipped into my emergency fund. I assumed that I would have more time to re-save and top up the funds before anything was to happen (boy, was I wrong).  Furthermore, I am not kidding when I say this, but the washing machine broke the day she left, and the water leaked through and damaged my ceiling in the kitchen.

In hindsight, this was a smaller unexpected expense that I wasn’t prepared for. I choose to go out and have fun rather than have enough of a cash cushion to land on when the unforeseen expense arrives. This is really the tip of the iceberg as a number of things could have happened, and could have been way worse.

Why You Need an Emergency Fund

Can you imagine not being prepared financially and the added stress of not having enough money to pay your bills?

I began to wonder about everyone else and what they are doing when things go wrong. In a survey completed from the financial analysis site Bankrate, they stated that “44% of U.S. adults would pay an emergency expense of $1,000 or more from their savings, as of December 2023” and “27% of U.S. adults have no emergency savings, as of May 2024 polling” So, Americans, in this example, fall short of savings when they urgently need them.

It’s important to save, even if it’s just a little bit, so you have something put aside for a rainy day that you can continue to build over time.

How Much Should You Save?

In my view, there is no right or wrong answer. Your magic number is whatever you feel comfortable with and is considered a reasonable amount that it would cover the larger expenses, if something were to happen.  

To calculate this amount, you will need to look at your budget to work it out. The general formula is your monthly expenses multiplied by the number of months you want your emergency fund to cover.

The General Rule of Thumb

So, if you are new to this, and you don’t have anything saved just yet. The good news is that it’s never too late to start, and we all need to start somewhere.

For someone just starting out, in my view, the general rule of thumb is to save at least 3 months’ worth of expenses to have something in the bank. That way you will have enough to cover any unexpected bills in the short term.

Levels of Preparedness

Getting By: 3 Months of Expenses

If you are a beginner, and you don’t have anything saved in your bank, this would be the ideal goal and first step to getting on track and learning how to manage your finances and future self (one day she will be grateful for this)

Getting Ahead: 6 Months of Expenses

You just hit your first saving goal and things have changed, you have come to realise in the larger scheme of things that 3 months’ worth of saving isn’t enough to really plan for the long term. Having 6 months of savings will put you in a much better position, so you are prepared to cover your essential expenses for a decent period. 

Once you live out of home, if you are renting or have a mortgage to pay, you know that you cannot put yourself in a position to not be prepared. If you were to lose your job, this buffer should provide you with plenty of time to figure things out, hunt for a position that you like and want to pursue, rather than being in a position of desperation and accepting anything that comes your way, so you can live. Your future self will still get a decent night’s sleep even when the tables have turned.

Prospering: 12 Months of Expenses

Having 12 months’ worth of expenses saved means that you have more than enough money in your emergency fund to cover all your necessary living costs for one full year, even if your income stops, or you face an unexpected financial situation.

Some might argue that after a certain point, such as 6 or 9 months’ worth of expenses, you may be over-preparing If you have stable income, secure employment, or additional safety nets, 12 months could be more than necessary, when you consider missed opportunities like stocks, real estate, or other assets that could grow your money.

You know your comfort levels, so do what is best for you. 

How to Start Building Your Emergency Fund

If you’re wondering how to get started, here are some quick tips:

Firstly, review your budget to determine how much you can set aside each month. If you haven’t done a budget before, She’s on the Money Budget Journal is an excellent resource to get started (you’re welcome).

Secondly, set a small, achievable goal, like saving one month’s worth of expenses, then build from there.

Thirdly, utilise money saver platforms like ShopBack, where you will receive a discount from the merchant and a cash back reward. I have used this platform for companies like Myer, Woolworths, Amazon, and MAC Cosmetics, with many more good brands on offer. I am a great believer that ever dollar counts in the long run.

Lastly, automate your savings by setting up automatic transfers to a dedicated emergency fund account. I personally use ING Bank where you can set up on going transfer payments, or you can round up every dollar to add to your savings account when you purchase an item on your card. If you click on this link, you could earn an extra AU $125.00 to open an account and follow the instructions as a great starting point for your emergency fund.

The key is to start now, even if it’s just a little bit. Over time, you’ll build a solid cushion for unexpected expenses.

Conclusion: Plan for the Unexpected

Whether you’re just starting to save or are already building your emergency fund, the important thing is to be prepared. Start saving now, even if it’s a small amount. Your future self will thank you when the unexpected happens