- The Australian Government recommends having at least three months' worth of living expenses in an emergency fund.
- This is there in case you hit a sudden unforseen expense, like a medical emergency or you lose your job.
- A high-interest savings account or an offset account if you have one are generally the best products to use for an emergency fund.
From your car breaking down to a life changing medical diagnosis, there are plenty of expenses that can be sudden and unforeseeable. A healthy emergency fund can mean not having to go into debt if you or your family are met with an unexpected large cost.
What is an emergency fund?
An emergency fund is there in case you need money urgently. It should be liquid, which means quickly accessible - it's usually not a great idea to have your emergency fund in a term deposit where you could be penalised for withdrawing your money before the term concludes. You could have your emergency fund in a transaction account or even a suitcase under your bed, but then it's not earning you anything. High-interest savings accounts work well for emergency funds, as do offset accounts.
How much do you need in your emergency fund?
Moneysmart, managed by the Australian Government, recommends aiming for an emergency fund that can cover at least three months of your living expenses. That's a good target to begin with, but if you can afford it there's no reason to stop there. Hiring platform Jora estimates it takes on average 3-6 months to find a job in Australia, so that could be another good target.
It's a good idea to work out (budgeting and saving apps can be a great help for this) roughly how much you spend each month, so you can put a dollar amount to aim towards for your emergency fund.
Isn’t insurance enough?
Insurance policies can sometimes help to pay for unexpected expenses. If you've got private health insurance or car insurance for example, you should be able to recoup the primary costs if you have a medical emergency or write off your car. Income protection insurance could also mean you may also be able to have an insurer pay part of your lost income if you can't work because of an illness or injury.
Ideally though, you'd have insurance in conjunction with an emergency savings account. Plenty of Australians are underinsured - not covered enough or at all for certain eventualities. Most insurance policies also have an excess, often hundreds or even thousands of dollars, that you'll need to pay out of pocket.
There can also be things that come up that you aren't covered for. For example, income protection insurance is for illness or injury related loss of income. If you're made redundant or fired, you likely won't be covered and may end up relying on your emergency fund while you try to find work elsewhere.
Savings.com.au's two cents
We all hope we'll never need an emergency savings fund, but like insurance you can end up in trouble without it. You might not like the idea of sequestering a portion of your net worth into an account you don't touch, but as your pool of emergency funds grows you might be able to dip into it in other circumstances - you might have enough spare for a holiday for example.
If you do decide to use a high-interest savings account for your emergency fund, remember to pay attention to whether the rate is unconditional or a 'bonus' rate. The latter generally have conditions that include depositing a certain amount in the account each month, or sometimes require you to make a minimum amount of transactions. If you'd prefer to just set and forget the money in your emergency fund without using it as a transaction account, you should look for products with no transaction requirement for the top rate.
How to start an emergency fund
Hopefully you’ve already done step one: work out up to six months’ worth of expenses and create a budget of how much you need to save. You can then move on to:
Find a high-interest savings account
Ideally, you’d want a savings account with a strong interest rate. Look for a savings account with a combination of a good interest rate, low or non-existent fees and manageable bonus conditions – see our article on bonus interest rates for more information on how this works.
You’d also want this high-interest account to be accessible, yet separate. It’s generally a good idea to have this account be separate from your main bank account to eliminate the temptation to spend the money – when the time comes you should be able to open a transaction account online with little fuss.
You don’t have to use a savings account either. You can also use a home loan offset account or even your investment portfolio , if you have one, although keep in mind your balance can fluctuate dramatically with the market.
Bank Savings Account Base Interest Rate Max Interest Rate Total Interest Earned Introductory Term Minimum Amount Maximum Amount Linked Account Required Minimum Monthly Deposit Minimum Opening Deposit Account Keeping Fee ATM Access Joint Application Tags Features Link Compare Promoted Product Disclosure
Rate varies on savings amount.
Rate varies on savings amount.
then 5.40% p.a.
Disclosure
then 4.00% p.a.
Disclosure
Set up automatic transfers
Once you’ve set up your separate bank account, you can either deposit a lump sum that represents months’ worth of living expenses or slowly build up to this amount over time through automatic transfers.
How much you choose to transfer is up to you. Some experts suggest transferring roughly 10% of every paycheck into a separate savings account, but you might need to do more or less than this depending on what your safety target is.
Some bank accounts also come with a ’roundup’ feature now: every purchase you make on your transaction account rounds up to the nearest dollar, sending the difference to a linked savings account. These small transfers can make a big difference over time.
Don't touch the money unless you have to
As your balance grows it might be tempting to dip in here and there for a weekend cocktail or Uber Eats, but this defeats the whole point of having an emergency fund. You should have a solid idea of exactly what circumstances you would dip into your emergency fund, and stay strict with that.
Article originally published by William Jolly in December 2018.