What Is An Emergency Fund and Why You Need it
- Mar 24
- 4 min read
Question, do you think you could raise $2,000 for something important within a week?
If you answered no, you’re not alone. According to the Australian Bureau of Statistics (ABS), nearly one in five households said they couldn’t come up with $2,000 in a week if they needed to. And we get it. Cost of living pressures, record house rental hikes and high inflation have made it incredibly hard for everyday Australians to stash away money for their “rainy day” funds.
Life is unpredictable. That’s why it’s important to be financially prepared for every situation.
Whether it’s a car breakdown, unexpected medical bill or job loss – an emergency fund can help absorb shocks so you can stay on track with your financial goals. Countless surveys have made one thing clear: the majority of Australians don't have enough saved for a financial emergency. If you’re one of them, keep reading to find out how you can create a financial buffer to ensure your setback doesn’t become a crisis.
What is an emergency fund?
An emergency fund is exactly what it sounds like, a fund for unplanned financial emergencies. It’s completely separate from your savings or a “treat yourself” jar as it solely exists to help you cover unexpected costs. Think of it as self-insurance, a personal safety net you fund yourself so when life goes sideways, you’re covered.
What Counts as an Emergency?
Real emergencies are unexpected, necessary and urgent. Some examples include:
Sudden job loss or significant reduction in income
Urgent medical or dental expenses not covered by insurance
Urgent car repairs
Critical home repairs
Unexpected travel for a family crisis
Bereavement or funeral costs
And just a reminder… flights on sale, a new phone or car upgrade don’t count as emergencies even though the temptation to dip into those savings are very real.
Why do I need an emergency fund?
Not everyone sees the need – a Finder Survey found that 8% of Australians believe a three-month emergency fund is unnecessary. An emergency fund is essential because unexpected costs today can financially set you back tomorrow. Without a financial buffer for emergencies, you might be forced to take on high-interest debt, dip into your savings or turn to family and friends for help. This leads to financial stress and in turn, desperate choices that may cost you more in the long run. Having a pool of money on the side for emergencies doesn’t just give you peace of mind, but also protects you from debt and keeps your financial life on track.
How Much Should I Save?
If you’re just kicking off your emergency savings, we recommend having one month of essential living expenses. These expenses include: rent or mortgage, utilities, groceries, transportation, insurance premiums and minimum debt payments. Don’t include discretionary spending such as shopping, eating out, travel or entertainment.
Once you’ve secured a month’s worth of emergency savings, aim for the next level: three to six months’ worth of essential living expenses.
The exact amount of emergency savings varies based on your personal situation, however, the most important takeaway is to just start. Even $500 is a meaningful amount for smaller emergencies, the key is to build consistently.
Where Should I Keep My Emergency Savings?
fund in a separate savings account. See the options below:
High Interest Savings Account
A high interest savings account keeps your money separate and earns a high interest, thus contributing more to your overall amount in the long run.
Mortgage Offset Account
A mortgage offset account saves interest on your home loan while keeping money readily available. The more money you have in the account, the less interest you pay.
Standard Savings Account
If you want to get started on your emergency fund today, a standard savings account is the easiest option but keep in mind the interest rates are much lower.
How do I build my emergency fund?
Building an emergency fund doesn’t need to be scary or overwhelming. You just need focus and consistency. Here are a few tips to get started…
Set a specific target. Start with a month’s worth of essential expenses as your first goal.
Automate your savings. Set up an automatic transfer to your emergency savings account every payday.
Start with what you can. Even a small amount like $50 each payday can add up.
Add windfalls to the fund. Whether it’s a work bonus, birthday money or a tax refund, give your fund an extra boost.
Evaluate your subscriptions. Whether it’s food delivery apps or streaming services, cut down on monthly or annual memberships and re-allocate to your emergency fund.
I had an emergency and used my funds, what now?
Great! We’re glad that your emergency funds were able to help you in a sticky situation. That’s exactly why it exists. There’s no need to feel guilty, instead, move forward and start replenishing your fund again. Life is full of ups and downs, who knows when the next emergency will strike again. At least when it does, you can feel confident and in control of your finances.
In short, an emergency fund is for everybody, not just those who are “better off”. It’s easy to get started – set a goal, build consistently and stay focused. It doesn’t matter how much is in your fund, what matters is that you take the first step towards financial stability.
Want to take control of your financial future? Get started with our free Financial Health Check here.
