How to build an emergency buffer
The one thing the COVID Pandemic has demonstrated is that the unexpected can happen at any time. While there are many things in life you can’t control, you can make sure you have enough funds put aside to help you get by. Here’s how to build your emergency buffer.
As anyone who lost their job overnight due to COVID-19 will tell you, it pays to have cash stashed away for a rainy day. An emergency can happen at any time, for any number of reasons. If it does, your emergency fund will provide a safety net to cover your living expenses until you can get back on your feet.
Using a credit card is not the best solution to get you through an emergency, as credit doesn’t replace your income. It just creates a debt that you’ll need to start repaying almost straight away, whether or not your income is back to normal.
Here’s how to build up your emergency savings, the smart way.
Set a goal
You’ll need to keep enough cash in your emergency fund to cover your living expenses for at least three to six months. For example, if your living expenses come to $5000 a month, you’ll need to keep at least $30,000 in your emergency fund.
If you are not sure how much you actually need, go through your bank statements and put everything into a budget.
Plan your how
Firstly, you need to be realistic with your goal timeline. How long it will take depends on how much extra cash you’re able to put aside each week or month.
For example, say you wanted to build your emergency fund within one year. If you needed $12,000 in your fund, that means you’d need to contribute $1000 a month.
Find small savings
If money is tight, you’ll need to go over your budget with a fine-tooth comb. Find every possible place where you could tighten up your spending and divert the cash to your emergency buffer. Think about cancelling online subscriptions you don’t use or examine your insurance costs as a starting point to find savings. Cut back on eating out for a while, or don’t buy any new clothes for a few months. Be ruthless to slash your unnecessary spending, so you can put the money towards your buffer.
Save a % of your income
Divert a set percentage of your income into your emergency savings, once your non-discretionary expenses have come out. Whatever you have leftover is your spending money for the month. For example, if you have $150 a week left over after expenses, you could contribute 30 per cent ($50) to your emergency savings fund.
Reaching your goal
Once you reach your savings goal, and you’re comfortable you can keep yourself afloat for three to six months, you can hit pause on your contributions. At this stage, you might want to divert the money you’ve been putting into your emergency savings into another type of savings, or even start an investment portfolio.
Where to stash your emergency savings
You want to keep your emergency buffer in a separate online savings account that isn’t accessible via a bank card or credit card. Out of sight is out of mind, so keeping it at a different bank to your regular transaction account is even better.
Don’t be tempted to invest your emergency savings. Investments by their nature increase and decrease in value over time. The last thing you want is to find yourself in a situation where you’re forced to sell down your investment at a loss, just so you can get access to your emergency funds.
Similarly, cash is king when it comes to emergencies. If you need quick access to the money, it’s easiest to withdraw cash from your bank account.
How to rebuild after an emergency
If a situation arises where you need to access your emergency savings, go for it, that’s what they’re there for. Once the emergency has passed, and you have an income to rely upon, you can simply top up the fund again and continue along your way.
Stu Varidel and Your Choice Financial Planning Pty Ltd trading as Heart Financial Advisers are authorised representatives of Sentry Financial Services Pty Ltd AFSL 286786.
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