Video: Building an emergency savings fund
Financial counsellor, Kristen Hartnett from The Salvation Army Moneycare explains how you can build an emergency fund to help you cope with unexpected expenses when things go wrong.
An emergency fund (also known as a rainy day fund or savings buffer) gives you some breathing space to deal with life’s ups and downs. You can use this money if something unexpected happens to you or your family, like your car needs major repairs, or you need to buy a new washing machine.
Here we show you how to build an emergency fund to protect yourself if things go wrong.
An emergency fund is an amount of money you have set aside to help cover the cost of any urgent and unexpected expenses. Having a savings buffer means you won’t need to borrow money if a crisis happens and you need money quickly. It can give you peace of mind that you can face any bumps in the road.
Start small to build your savings
The secret to building a savings buffer is to start small and save regularly. It doesn’t matter how much – or how little – you save, you just need to make a start, and then keep going.
For example, if you save as little as $10 or $20 per week, you’ll have $520 or even $1,040 by the end of the year. That’s the start of a solid amount of savings that will give you some financial breathing space.
See how saving a little each week can help you reach your savings target.
Saving regularly is the best way to build up your savings balance. Set up a separate high interest savings account for your savings to go into via automated payments set up with your bank. You can also ask your payroll department if they can send part of your pay to your savings account.
Then you can set and forget, knowing that your savings are growing without you having to transfer them every time you get paid.
If you find a savings account that offers bonus interest for every month you don’t make a withdrawal, you’ll be less likely to touch the money unless it’s an emergency.
Savings round up
Some banks now offer an option to round up purchases you make using a contactless card and transfer this amount to your savings account. You can set the round up amount to the nearest $1 or $5.
For example, if you set your round up amount to the nearest dollar and you buy a coffee for $4.50, your account will be debited with $5 and the 50c change will be added to your savings account.
Maximise your offset account
If you have a home loan with an offset account, you could use this account as your emergency fund. That way, your money will be working to reduce your interest payments, but will also be available to use if you need it.
Track your expenses
It’s easy to lose track of the money you spend everyday. By getting into the habit of recording what you are spending your money on, you’ll be able to identify areas where you can save.
Avoid impulse buying
Every dollar you spend on an impulse purchase is another dollar you don’t have to build your savings.
Save spare change
Who said piggy banks are just for kids? Get an empty jar or ice cream container and put your spare change into it at the end of each week. When the container is full, deposit the money into your emergency fund.
Do a budget
A budget can help you get a better picture of your finances, allowing you to plug any spending leaks you might find.
Work out what your household expenses are.
Keep adding to your savings
If you happen to get any extra money during the year, for example from a tax refund, you can add this money to your savings pool.
Saver Plus helps families on low incomes develop a savings habit, build assets and improve their financial skills. You set a savings goal and receive support and education to help you achieve it. When you reach your goal, your savings are matched, dollar for dollar, up to $500.
When to use your emergency fund
Receiving an unexpectedly large or urgent expense is never a good feeling, but having a savings buffer will help to keep your stress levels down. You won’t have to worry about where you’ll get the money to pay for it, and you can focus your energy on solving the problem.
If you need to dip into your emergency fund, remember to top it up again afterwards.
Keep your emergency fund for those expenses you really need to pay now. If you want to use your savings for something else, then set up a separate savings goal.
Case study: Briony uses her rainy day fund
Briony had been building an emergency fund for 2 years and had saved more than $1,000. To build up her savings, she had set up automatic transfers on payday from her bank account straight into a high interest savings account.
When her car suddenly broke down, she used some of the money from her savings account to pay for it to be fixed.
Briony was relieved to know she didn’t have to put the car repairs on credit or ask her family for money. Also, because she has set up automatic transfers, she could top up her emergency fund again from her next pay.
An emergency fund gives you control over your finances in a time of crisis. By regularly saving for a rainy day, you’ll be able to weather life’s storms.