Creating Your Emergency Fund for Financial Peace of Mind
PLEASE NOTE: This is not financial advice. The information in this blog post is for educational purposes only.
If you’re new to the world of personal finance, you may not know about a financial educator by the name of Dave Ramsey. Now, Dave is a bit like marmite in the financial community – you either love him or hate him – but in my eyes, his baby steps outline to financial freedom makes a lot of sense, especially the first step – getting yourself a stage one emergency fund.
In Dave’s view, this first-stage emergency fund should be $1,000 (that’s US dollars). A lot of people argue that in today’s economy, $1,000 isn’t enough, and while that’s probably true, what’s also true is that in this economy, if you’re struggling with money, trying to save $1,000 is extremely difficult.
While I was on the benefit, before I started back working, there was no way that I could quickly scrape together $1,000. When I did start a job, however, reaching a $2,000 emergency fund was my first major financial goal – and believe me, it took me ages to hit but the security of having that little financial buffer was priceless.
If you’re getting started on your financial journey, and you want to also gain a sense of security, here’s what you need to know about emergency funds based on what I’ve learned from other financial educators and my own experience.
The Importance of an Emergency Fund: Your First Financial Goal
When you’re starting fresh, especially after a divorce or separation, having an emergency fund should be one of your top financial priorities. An emergency fund provides a financial cushion that can help you through unexpected expenses, such as medical bills, car repairs, or sudden job loss. This fund is essential because it offers peace of mind and financial security, allowing you to handle emergencies without falling into debt or financial crisis.
Imagine that you’re living paycheque to paycheque and your car breaks down. If you don’t have an emergency fund to draw from to get your car repaired, you’ll probably have to take out debt on a credit card or loan to get it sorted. This is how your financial situation can spiral out of control – having to use credit with interest to solve emergencies will keep you stuck in a cycle of poverty.
The First Step: A $500 to $1,000 Emergency Fund
Before aiming for a full 3-6 month fund, set a more manageable initial goal. Saving $500 to $1,000 can provide a crucial buffer against minor emergencies and is a significant step towards financial stability. This smaller fund can help you cover unexpected expenses like minor car repairs or medical fees.
If you’re reading this and freaking out, thinking that it’s unrealistic to suggest trying to save even $500 in this economy, then adjust this figure for what is achievable for you. As a starting point, even saving $100 can be a significant achievement.
But once you’ve achieved that $100 – no matter how long it takes – keep going with your saving and make a commitment to trying to create a solutions-focused mindset. Aside from saving your benefit money, or saving your paycheque, what other ways can you create extra income to help you bank the money for your emergency fund?
Here are some ideas – they may or may not apply to you but may get your brain ticking over to find solutions:
Do you have items that you could sell on TradeMe or Facebook Marketplace? Kids prams, cots, or cat seats that you no longer use?
Do you have time available to offer cleaning services, or wash cars or mow lawns? Even dog walking, pet sitting or running errands.
Do you have a spare room that you could rent out?
You can do online surveys to earn money. Just Google ‘Paid online surveys NZ’ to get started.
Do you have any skills that you can share? Music lessons, math tutoring etc.
If you’re struggling to come up with ideas, jump onto the ChatGPT website, give details about your skills and limitations and ask AI to help you brainstorm some money-making solutions that are suitable for your situation.
Every dollar saved is a step closer to financial security and peace of mind.
The Next Steps: Calculating Your 3-6 Month Emergency Fund
Once you’ve reached your initial $500 to $1,000 goal, aim for a second stage emergency fund of three months’ worth of expenses. This larger fund provides a more substantial safety net and can cover more significant financial disruptions.
If you have children, consider saving a six-month emergency fund. Children often bring additional unexpected expenses, such as medical costs or educational needs. A larger fund ensures you’re better prepared to handle these without financial strain.
To determine the amount you need for a 3-6 month emergency fund, start by calculating your essential monthly expenses. These include rent or mortgage, utilities, food costs, transportation, insurance, and your minimum debt payments (if you have debt). Multiply this total by three to six to find your target emergency fund amount. For instance, if your monthly expenses are $2,000, your emergency fund should be between $6,000 and $12,000.
Where to Keep Your Emergency Fund
Your emergency fund should be easily accessible but not so easy to dip into for non-emergencies. A high-interest savings account is an excellent place to store your fund as it means that you’ll be earning money on your fund while it’s sitting there waiting for you to dip into for an emergency. If you leave your emergency fund in a basic savings account you will be missing out on the higher interest.
Look for an account with no monthly fees and a good interest rate. Avoid accounts linked to your everyday spending to minimise the temptation to use the funds for non-emergency expenses.
To find the best high interest savings account available, just Google ‘Top High Interest Savings Account in NZ’. I currently have mine with Squirrel and they give me an interest rate of 5.29% (that’s not an endorsement, please do your own research and figure out which account is right for you).
Defining Emergency Fund Uses
If you want your emergency fund to truly do its job, it’s essential to clearly define what constitutes an emergency. Your emergency fund should be used for unforeseen expenses that are necessary and urgent. This includes things like medical emergencies, essential home repairs, unexpected travel for family matters, or a sudden loss of income. Avoid using the fund for planned expenses or non-urgent purchases – for example, buying consumer items that are on sale, or going on holiday.
It can be tempting to want to dip into this fund, especially once it starts getting bigger. Just remember that future you will thank you for being responsible and leaving this fund for emergencies when they crop up.
Automating Your Savings
When you get paid, as part of your budget, you should set up automatic transfers to your emergency fund. This can make saving easier and ensure that you’re consistently putting money aside without having to think about it each month.
Remember, every journey starts with a single step. Begin with small contributions to your emergency fund, and over time, these will add up. Consistency is key, so try to make regular contributions, even if they’re small.
The Peace of Mind an Emergency Fund Brings
Having an emergency fund offers immense peace of mind. It provides a financial buffer that helps you manage life’s uncertainties with confidence. Knowing you have funds set aside for emergencies can reduce stress and allow you to focus on rebuilding your life and achieving your financial goals.
Building an emergency fund can be challenging, especially when you’re starting from scratch. It might take time to save even a small amount, but persistence is key. Look for small ways to cut expenses or increase your income, such as reducing non-essential spending or picking up a side gig. Every little bit adds up, so keep going, and don’t get discouraged.
Regularly review your emergency fund to ensure it still meets your needs. As your financial situation changes, you might need to adjust your savings goals. If your expenses increase, consider increasing your emergency fund to maintain adequate coverage.
Today, I have a fully funded 3-month emergency fund and my next financial goal is to fund this to six months.
Over to you. How do you think you’d feel with a fully funded emergency fund? Feel free to download the savings tracker that I’ve put together for you as part of my ‘Budgeting Bundle’ to help motivate you towards your emergency fund savings.
Do you have any questions that weren’t answered in this blog post? Get in touch and let me know.
