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How much money do you need in your emergency fund? Plus how to save for a rainy day.
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By MyBudget Editor

An emergency fund is money you set aside for unexpected expenses. Think: car and house repairs, emergency vet bills, job loss and other worst case scenarios—the sorts of events that can come out of nowhere, cause immeasurable stress and blindside a budget. All of which begs the question: what size safety net do you really need and what’s the best way to save for it?

It’s Friday afternoon and your manager calls a team meeting. It’s a colleague’s birthday and you’re expecting to see a cake. Instead, there’s no cake and the mood is sombre. After everyone has found a seat, your manager delivers the news that the business is restructuring and you’re all being let go.

You walk out of the meeting feeling numb. Only on the drive home do you start to think about what it actually means. You have your mortgage to pay, school fees, car payments, insurance, a holiday coming up. Your food bill alone is more than $1000 a month.

By the time you get home, your mind is racing and your heart thumping in your chest.

When things get real

Until a couple of months ago, most people would have read those paragraphs and thought “yeah, but my job is secure—that won’t happen to me.”

Then the entire world gets thrown a financial curveball called coronavirus. Suddenly, millions of Australians are facing business closures, job losses and an economy in downturn.

Some will fall softly onto the safety of their savings, while others will have to rely on the government welfare net. Fortunately, the government safety net just got stronger. Unfortunately, not everyone is eligible. And for those who do qualify, support payments may not cover all of their expenses.

It’s also important to note that millions of households are actually better off. They have the same income as before the pandemic, but considerably lower costs due to social distancing measures.

In other words, this is not just an opportunity for people suffering income loss to examine their spending habits. This is a chance for every household to think about how they want to emerge after COVID-19. In front of the curve or behind it?

When ‘what ifs’ become ‘what now’

According to a pre-COVID-19 survey by AMP Bank, one in five Australians aren’t saving any of their monthly income and have less than $250 in the bank. Meanwhile, a separate study conducted by Deloitte and Compare the Market revealed that 13.4 million – or 68% of us – don’t have sufficient emergency savings to cover an income interruption of three months.

Basically, heading into 2020, a lot of Australians didn’t have enough spare cash to cover an emergency car repair, let alone the economic fallout of a prolonged pandemic.

We live in one of the richest countries in the world, so how did this happen?

It’s because a lot of people think of their personal finances in terms of cash-flow. They look at their bank or credit card statement at the end of month to see if more money came in than came out. To get ahead, however you need to think about and plan for the future—and you need the right tools to help you (see video below). 

A credit card is not an emergency fund

First things first – and this is important – a credit card, line of credit or payday loan is not an emergency fund. Neither are your parents, your best friend, partner, girlfriend, boyfriend or anyone else you might be tempted to lean on.

While credit products can help bail you out of unexpected financial situations, they come at a cost. Credit and loans are money that has to be paid back. Once you factor in interest and other charges, you have to pay back more than you borrowed in the first place.

For a lot of people, this leads to short-term stress-relief, but long-term financial strife.

Instead, your contingency fund should be a savings safety net created out of money you have set aside specifically for an emergency or unexpected bills.

Think: a window that needs replacing due to a poorly aimed cricket ball. Your dog eats an entire bag of Easter eggs and needs an emergency visit to the vet. The timing belt on your car needs replacing. These are all unexpected expenses or emergencies.

Once you have some money set aside for emergencies, it’s important to resist the temptation of dipping into it. Cheap flights to Bali, retail sales, nights out with the boys/girls are also great things to save for, but they should never eat into your emergency fund.

How much money is enough?

There’s no hard and fast rule as to how big your safety net needs to be, but here are some rough guidelines.

If you have existing debts—especially a high interest personal loan or credit card debt—paying those off should be your priority. That doesn’t mean you should have no emergency savings. It means that you should save up $1000 and keep it in a hard-to-access account. Meanwhile, throw all your spare cash at your high interest debts to pay them off as fast as you can. Once they’re eliminated, then you can grow your emergency fund.

For everyone else, the size of your contingency fund is going to come down to your individual financial commitments. For example, a family of four with a mortgage, school fees and bills will have to cover much higher monthly expenses than a twenty-something living at home with their parents.

Work out your needs from your wants

The first step is to look at all of your expenses and separate them into needs and wants. Print off your last couple of months of credit card and bank statements and go through them with two highlighter pens. For instance, use yellow to highlight your basic, essential living expenses; pink for everything else.

Your essential expenses represent what it costs to keep a roof over your head, food on the table, a car on the road (or other form of transport) and other essentials, like medicines. For some households, their basic costs might also include education.

Everything else is discretionary or optional spending. Think: Netflix, gym membership, eating out, going to the pub, and so on. In tough times and when need be, your discretionary expenses can be cut. If you were to lose your job, for example, you could suspend your Foxtel subscription for a couple of months, but you’d have to keep paying your rent.

How to calculate the size of your savings safety net

When working out how much to stash away, a good goal is to have enough savings to cover three months’ worth of essential expenses. Six months would be even better.

According to the Australian Bureau of Statistics, the average household spends $846 a week on basic costs (2015-2016 survey data). Multiply $850 by 12 weeks and you have a savings safety net goal of $10,200.

Don’t despair if that figure seems impossible right now. The idea is to save up that amount over time. Just $10 a week would mean you’d have a contingency fund of more than $500 within a year, while $20 would put you over $1000.

When it comes to your emergency fund, any amount you have saved is better than nothing.

How to find extra money to stash away

The secret to building up your safety net may be simpler than you think. It’s all about having a plan and supporting that plan with a system. The more set-and-forget that system is, the better.

Related article: Forget about setting financial goals. Do this!

For most people, extra money is hiding in their spending habits. For example, you could save $5 to $20 a day by making your morning coffee at home and bringing your lunch to work. Some people save thousands in one go by shopping around for cheaper insurance or a better phone plan.

To give your emergency fund an instant boost, you could add in any lump sums you receive, such as your tax refund, a work bonus or birthday money. You could clean out your cupboards and sell some items you no longer need. You could try your hand at a hobby business.

How to create your emergency fund

Once you’ve worked out your savings goal and how much you can afford to put aside, it’s time to take action. Remember, even just $5 a week is a great starting point. Small savings will add up over time.

Your contingency fund should be kept in a separate savings account. Not a jar or envelope or under the mattress. Unless you’re very disciplined, those hiding places are too easy to access.

The one exception is mortgage holders who have an interest offset redraw facility attached to their home loan. If so, keep your savings in that account to reduce the interest you’re paying on your mortgage.

You want to set up a direct debit or automatic transfer of a consistent amount into your contingency fund each time you receive income. To avoid temptation, opt out of having a debit card attached to your emergency fund account.

At MyBudget, every dollar of our clients’ income is automatically organised into their budgeted expense and savings streams. This sort of money automation is powerful because it requires no effort on the client’s part. It’s one of the reasons our clients are so successful at achieving their financial goals.

If you want to make dipping into your emergency fund even harder, you can look at putting your money into a term deposit once you have a few thousand dollars set aside. Just be aware that interest earnings are incredibly low right now and locking your savings into a term deposit could incur break fees if you need to access your money before the term matures.

Get started now

You can find more information about getting ahead of the COVID-19 curve on the MyBudget Blog.

Or you can talk to a money coach for free by phoning 1300 300 922 or enquiring online.

We can create a free customised budget for you that helps you make strong financial decisions for now and the future.


Read more about COVID-19 financial relief measures, download a budget template, discover how MyBudget works, sign up for money tips on the MyBudget Blog or follow MyBudget on Facebook.

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