Building an Emergency Fund for Your Peace of Mind
It can be stressful to worry about how to handle a crisis when life throws you a curveball, such as a layoff, a medical emergency, or even just a hefty cost for car repairs. And if money is tight, that merely makes things more stressful.
Imagine, though, that you have a hidden cash reserve—an emergency fund—that will cover the expenses and give you the mental room to address the issue.
An emergency fund actually serves as the cornerstone of a strong financial plan and an essential safety net. No matter your age or financial status, it makes sense because anything unexpected can happen to anyone.
You can be forced to use credit cards or loans if you don’t have a cash reserve, which can be detrimental to both your financial condition and mental health.
Your ability to weather storms that come your way without accruing unnecessary debt and interest payments is made possible by having an emergency fund.
How Much is Sufficient?
Of course, when inflation is eating away at your salary, saving might be difficult. Households are under a lot of stress as a result of rising rents, loan rates, and food prices. According to the Australian Bureau of Statistics, household savings have been falling for more than a year as consumers struggle with rising costs, including higher mortgage payments.
Yet, if you make even a small but consistent deposit into a separate fund, you will eventually build up enough to handle emergencies.
Your individual situation will determine the size of your emergency fund, but a commonly cited goal is enough to pay for three to six months’ worth of living expenses.
It might be different if, for example, you want to start a family and need money set aside to bridge the gap between parental leave payments and a salary; you have kids in school and need to be able to pay for their tuition for at least a year; you need to take time off work to care for a family member; or you need to take an unexpected trip or vacation.
On the other side, having a safety net against market volatility can be beneficial if you have retired. A full year’s worth of living costs set aside in an emergency fund can significantly improve your standard of living if the markets experience a downturn and your superannuation is not generating the kind of income you desire.
The most important thing to keep in mind is to get to work as soon as you can on rebuilding your emergency fund if you must take a withdrawal from it.
Increasing Your Fund
You can determine how much you can afford to save each week, fortnight, or month by creating a budget. The objective, no matter how modest the amount, is to constantly save until you attain your goal.
To lessen the possibility that you will use your savings for normal expenses, it is better to maintain your emergency fund separate from your transaction account for everyday spending. Setting up a direct debit is one way to pay yourself first, preventing the temptation to take money out of your savings and allowing your emergency fund to grow automatically without your involvement.
It’s crucial to choose the right kind of account for your emergency money. While shares and term deposits may provide better returns, they should be easily accessible so that they can be swiftly accessed when needed. To get the most of your hard-earned money, shop around for a bank account that pays the highest interest.
A strong financial plan must include the creation of an emergency fund because it acts as a safety net in case of unforeseen circumstances. We encourage you to get in touch with us if you have questions about how to create an emergency fund. We can advise you on the best solutions for your particular financial circumstances and assist you in taking action to lay a solid financial foundation.
In addition, the following articles might be of interest to you:
- How To Prepare Super For EOFY
- Secrets To Why The Rich Get Richer
- 8 Common Retirement Mistakes and How to Avoid Them
Success Wealth Group is here for you and your family to help you save money, taxes and invest for the future.We look forward to helping you to ‘Bringing Wealth to Life’.
About Lan Nguyen
Lan is the Founder and Chief Strategist at Success Accounting Group, Melbourne based CA firm. In a matter of short 8 years she has built up a reputable Chartered accounting firm with 3 offices and a team of 6 professional accountants and support team members. Her mission is to provide Innovative and Strategic Financial advice to help her customers make smarter financial decisions today for a brighter future.
Success Accounting Group is for established business owners who would like help to grow a sustained business. As a business owner you understand what drives your business success with our accounting team taking care of the rest.
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Success Accounting Group Pty Ltd
Oakleigh, VIC, 3166
