Can you afford an emergency?
The wisdom says we should hope for the best and plan for the worst but, more than just mentally and emotionally bracing ourselves for potential disappointment, we need to be practically prepared for an emergency.
This year, 2020, has proved to Australians, without a doubt, how important it is to be prepared. There’s no denying that with the devastating bushfires and the global effects of the coronavirus pandemic we are all facing a future that is uncertain in every which way – especially financially.
For people who are suddenly without job security and who may be facing unemployment, an emergency fund would be unquestionably invaluable.
If you’re wondering just what an emergency fund is then read on to find out why it is absolutely essential for every saver.
What is an emergency fund?
Before we define an emergency fund we need to talk about what we can consider an emergency. In this case, it’s something that would see you spending more money than you would have expected without having extra money coming in to cover it. Think about your computer going on the fritz, your car breaking down, needing a medical procedure not covered by medicare or your insurance, needing to travel to visit a sick loved one or losing your job right before rent is due. Needing a holiday or a good brunch is not an emergency but the situations listed above are essential things that need quick fixes to keep your life on track.
An emergency fund is an account you make regular contributions to that you can dip into to help cover these unexpected expenses.
How much you contribute to this fund is totally up to you. Even contributing $10 a week will leave you an emergency fund of over $500 after a year. A good idea is to have a fund that would cover 2-3 months of regular expenses including rent, food and utilities. If you’re unsure how much this would mean, keep a spending diary over a month and then multiply the amount. If you’re looking for spending diary inspiration, check out Whimn or Refinery29.
If you’re still wondering why you may need an emergency fund, remember this money is like a safety net. If you become unexpectedly unemployed an emergency account like this could cover expenses while you searched for a new job. This money literally buys you time to search the job market and find employment that is both rewarding and fulfilling rather than forcing you into the first job that comes along just because you are understandably stressed about the financial hit you may be taking by being unemployed.
What sort of account should you have for your emergency fund?
It’s a good idea to seperate your emergency fund account from your regular spending and savings accounts. It’s important that you have money squirrelled away specifically for an emergency and having that money in your regular savings account makes you far more likely to spend it on non-emergencies such as travel or treats. And, while we’re definitely not opposed to treating yourself, that’s definitely not something you can consider an emergency.
So, what sort of account should you be depositing your emergency fund into? Because you never know when you’re going to be facing an emergency, you’ll need an account that allows you access your funds on a moment’s notice with a reasonably high withdrawal limit. Look for a savings account with a competitive interest rate because, while your interest may only earn you an extra dollar here and there, when you’re in a precarious position requiring the use of emergency funds, every dollar counts. You may also be able to get an account which offers bonus interest if you deposit a certain amount every month – do a bit of research to find out if you meet the conditions to be earning extra interest. For more information on what sort of account to choose for your emergency account check out this informative article.
Another tip would be to set up an automatic deposit into your emergency account every week. In fairweather, when things are going well, it’s easy to forget to brace for a storm but, if you set up an automatic deposit you’re making a sensible plan for the future without even realising it and preparing for an emergency even when it’s the furthest thing from your mind.