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Why you need an emergency fund

Why you need an emergency fund, with Money Bites
How to kick financial stress to the curb with an emergency fund.

Bite-Size Read:

  • Many of us are stressed about our finances.
  • An emergency fund is a savings buffer you can access when you need it.
  • Here’s why you need an emergency fund as insurance against life emergencies.

Are you stressed?

When it comes to our finances, a third of us are struggling with debt. Debt is stressful, particularly if you don’t have savings to support you if you lose your income. A quarter of Australian households have less than $1,000 in cash savings to draw on in an emergency should the worst happen.

That’s where an emergency fund comes in.

An emergency fund is money set aside to cover unexpected expenses. Whether it’s losing your job, needing to travel at short notice or to cover the cost of a medical emergency, life happens and it brings with it the need to spend money you didn’t expect to spend.

I like to call it my BBEF – my best back-up emergency fund, because like a best friend, it’s there for me when I need it the most. As organised as you might be, the power of this fund is that it cushions you from the financial shocks you can’t see coming.

 

Here’s why you need an emergency fund:

 

1. It’s a stretch goal to start savings habits

If you’re not used to saving money, an emergency fund can be a great way to get started. By setting yourself a savings target of $1,000, you can take steps to build an emergency fund over time. There are multiple ways to save $1,000 fast, including saving money on your everyday bills such as your phone, groceries and electricity bills. Building this fund as a savings stretch goal will train you to develop savings habits to help achieve those goals.

 

2. You have choices and can escape bad situations

Life happens to everyone. You may get stuck in a job your hate, and want to get out of a toxic work environment. You might end a relationship where you were living with your partner and need to move out quickly. An emergency fund is a cash reserve that you can draw on in these situations as money to throw at the problem to make it go away.

 

3. You worry about money less

Part of the reason we feel stressed about money is we’re worried about not having enough. During winter, we worry about what our electricity and power bill will be when it arrives. When a recession occurs, we’re worried about its impact on our money, including potentially losing our job. The benefit of an emergency fund is you have savings available to support you should the worst scenario you worry about become a reality.

 

4. You work for yourself

If you work for yourself as a business owner or contractor, you have the option to work more flexibly. This includes choosing what you work on and who you work with. However, freelancing can become a struggle financially, including when clients don’t pay you on time. An emergency fund can be used to help you still pay your bills when your income varies from month to month.

 

5. You have financial commitments to meet

While owning your own home is a brilliant achievement, most of us will do so with a mortgage or loan from the bank. That mortgage is a financial commitment because you need to pay money to the bank every month. If you don’t meet that commitment, there are consequences. Other financial commitments might be student fees or credit card debt. The power of an emergency fund is that you can meet those financial commitments, even when you’re in financial difficulty.

An emergency fund is insurance against life emergencies.

Taking steps to build an emergency fund means giving future-you choices about what you do when faced with a life emergency. The security and freedom that this savings buffer affords you is worth saving for.

Written by Kate Crowhurst

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