Having an emergency fund to dip into in the case of a leaky roof, illness or injury or some other disaster is a great way to protect your and your finances.
However, in a time of increasing mortgage repayments and rent and the higher costs of living, it can be challenging to get this money together. In fact, many of Australians don’t have an emergency fund or a fund with sufficient funds to cover an emergency.
With interest rates on savings accounts historically low and starting to increase you might be wondering if there are better options for putting together an emergency fund. For mortgage holders, a good option was to put your emergency fund savings towards additional payments for your home loan or in an offset account.
The average home loan rates are about 3.4%. You can't get anywhere near that as a savings rate - you can get around 1%.
Using this strategy, mortgage holders can knock down their loan principal faster, pay less interest and get their money back if they need it via a redraw or dipping into their offset accounts, if they have one. So, it’s a good place to put your emergency funds.
If you plan to rely on redraws to access your emergency funds, you’ll be putting extra payments towards your loan to chip away at the balance faster. You can then access these funds via a redraw if you need them.
An offset account works differently. Instead of paying back the loan directly, contributions to an offset account don’t bring down the balance of the loan but work to reduce the amount of interest you end up paying on your loan. Offset accounts are slightly simpler to withdraw money from because they are separate accounts.
Savings Tips
According to recent research, more than 33% of Australians don’t have an emergency fund.
For the 66% per cent of people who do have rainy day savings, the average amount set aside for disasters is $8,000. That’s enough to cover around three months of home loan repayments, based on a typical $500,000 mortgage. This is unlikely to be enough if a big crisis has occurred. You should be considering a target substantially larger figure of at least $40,000.
Some extra tips for saving an emergency fund.
Automate: Set up automatic payments into your emergency fund to make sure money always goes out
Round-up: These work by rounding up any debit card purchases you make - often to the nearest dollar - with the difference being transferred to your savings account
Lump sums: Put your tax return or bonus straight towards your emergency fund
Competitive: Savers are already seeing more competitive offers now that interest rates are rising, so it pays to shop around.
Stu Varidel and Your Choice Financial Planning Pty Ltd trading as Heart Financial Advisers are authorised representatives of Sentry Financial Services Pty Ltd AFSL (Australian Financial Services Licence) 286786.
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