As we strengthen our financial foundations, one crucial element often overlooked is emergency savings. It’s a lifeline that offers protection against unexpected financial challenges.
Here’s how to get started.
STAGE 1: SAVING $1,000
As the first stage in building your emergency fund, aim to save $1,000 as quickly as possible. This initial mount serves as a buffer against minor emergencies and is sometimes called a Quick Solutions Fund.
Look into setting up a separate bank account specifically for your emergency savings. This ensures it remains accessible but not visible in your day-to-day bank account.
Practical tips for building this first $1,000 fast include:
- Cutting unnecessary expenses such as eating out or extra subscription services
- Selling unused items or assets
- Taking on additional part-time work or freelance opportunities
- Adding any unexpected income, like tax refunds or bonuses, into your emergency savings.
$1,000 can seem like a lot when you’re starting out. Set up mini money milestones such as each $100 or $250 increments to ensure you have an achievable goal and celebrate your progress.
NOW PAY OFF DEBT
Saving your emergency fund happens in two stages. In between it’s crucial to pay off all consumer debts, such as credit cards, buy-now-pay-later schemes, and personal loans. Eliminating these debts strengthens your financial foundation and frees up more of your income to support your most important financial goals.
STAGE 2: SAVING 3-6 MONTHS OF ESSENTIAL EXPENSES
The next step is to grow from your first $1,000 up to 3-6 months’ worth of essential expenses. These essentials include food, utilities, rent or mortgage payments, and transportation costs necessary for maintaining your income. It’s important to focus on covering these basic necessities rather than including lifestyle or discretionary expenses.
WHAT’S A REAL EMERGENCY?
Emergency savings are designed to handle unexpected expenses that require an immediate response.
But we need to be mindful about when to tap into this safety net, otherwise it may not be there when we truly need it. Being clear about what counts as a real emergency is critical, for instance, a broken hot water system qualifies as an emergency, while a tempting deal on flights to Bali does not. Distinguishing between genuine emergencies and discretionary spending helps prioritise the use of your emergency fund.
RECHARGE THE SAVINGS
When the unexpected occurs, and you need to dip into your emergency savings, it’s essential to have a plan in place for replenishing those funds. Pressing pause on other financial actions, such as paying extra to clear consumer debts or allocating funds to savings and investment goals, allows you to focus on topping up your emergency savings once again.
Once this fund is back where it needs to be, you can then resume your debt repayment strategy or continue working towards your savings.
