Emergency funds: the money you never want to use, but need to have

2020, oh it’s been a goody. This year has reminded us that life is full of the unexpected. Did anyone start the year prepared for a global pandemic that would go on to damage the health, social bond and economic security of millions around the world?

Living in New Zealand we’ve all become acutely aware of the risks of a natural disaster, but our “she’ll be right” Kiwi attitude means we have often down played the risks of job losses, serious health issues or disruptions to our home life.

It doesn’t even have to be so dire; as several of the team at Kernel have experienced, an unexpected vet bill can set you back well over $2,000. An expense like that and you might be supremely out of luck financially.

There’s no doubt that a sudden loss of income can cause significant stress and makes managing your finances challenging to say the least. This is where the Emergency Fund steps up and saves the day.

What’s an Emergency Fund?

Your emergency fund is an easily-accessed source of money that is safeguarded in case of these unexpected emergencies. The purpose is that you’ll be able to use these funds to get through unexpected expenses.

When should you start an Emergency Fund?

Now! Right now. As we’ve seen this year, most of us aren’t well prepared and do not have a sufficient emergency fund in place. So it’s time to start today!

Having an emergency fund is not something you should put off; these unexpected events are exactly that, unexpected.

If you have the savings available now, then make sure you have a lump sum in a separate savings account. If this is not your current position, start by putting regular, small sums of money aside until it’s grown into a fund that meets your needs.

A note of caution: before you do anything else with your money, make sure any high interest debt is paid off, such as credit cards or personal loans. No point in saving at 2% interest or less only to pay 20% interest elsewhere!

How much will my emergency cost?

Well, that’s a hard one. As is the question of “how much should I have in my emergency account”. There are so many variables. There are many methods to determine how much cash you need and the choice is yours. It really depends on your personal situation and comfort levels.

Things to consider

Are you the sole income earner? Do you have family you could depend upon for financial assistance? Do you have children? Large, regular costs like a mortgage? All of these will alter your particular needs, but you’ll want to consider this as you work out how much you need in various unexpected situations.

Some common approaches:

  • One to three month’s net income – to replace your income should you have unexpected time off work
  • Three months’ worth of loan repayments or rent plus bare minimum living expenses (like groceries and bills)
  • Minimum $5,000 for a single and $10,000 for a couple

Where to keep your emergency funds

You’ll need to be able to access your emergency funds within a day or two of something happening and you’ll want it to be there in full. This means you shouldn’t put your emergency fund into long term investments like stocks.

Unfortunately in today’s low interest rate environment you can’t expect much of a return on this pot of money, but you can still earn something by considering the following:

Savings account. Most banks offer on-call or savings bank accounts. The interest rates are typically low, and while there isn’t a government guarantee (yet), the major banking providers in NZ are fairly safe. Look for an account that has no or low fees. i.e. watch out for monthly account fees, or interest rates that are reliant on regularly investments or no withdrawals.

Term deposits. This will give you a higher rate than most savings or on-call bank accounts, but your money will be locked away and there will be a penalty fee if you need to access the money early. If you are wanting to get a higher return on your emergency fund, then this may be an option.

You may actually choose to have part of your emergency fund in a savings account and in term deposits. Remember though to keep it simple and easy to manage.

Emergency Fund Top Tips:

  • Calculate your monthly minimum expenses, consider your personal circumstances and then work out the right emergency fund balance for you
  • Interest.co.nz is a great site to find the latest term deposit and savings accounts rates
  • Make sure you look at the fees as well as the interest rates
  • You don’t need to have your emergency funds at the same bank as your day-to-day bank – in fact, if it is with a separate provider you may be less tempted to touch it unnecessarily

This post is part of Ask Kernel Money Week – a chance for you to ask your money questions to financial experts & receive a personal response! Savings on your mind? Ask us here.


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