New empirical research from Budget Direct Home Insurance has revealed alarming data that Australians cannot afford to deal with a major unexpected expense. The research interviewed 1000 Australians and found that a significant number of them are at risk of extreme financial stress because they have minimal safety measures in place. Only 45.5% of individuals surveyed could confidently say that they can afford an unexpected $1,000 emergency using only cash or their savings.
How to set up an Emergency Fund
The research has shown that over half of Australians have no financial flexibility or freedom. Although it is not fun or exciting, the key to preventing financial ruin is to start saving and build an “emergency fund”. Without an emergency fund in place, it is only a matter of time before an unexpected crack shocks the foundation of unstable personal finances, causing the whole house to come crashing down! So, let’s address how to start an emergency fund? The first step in establishing an emergency fund is to calculate your budget, income, and expenses. Figure out the “bare minimum” amount of money per week that you require to survive (feed your family, pay your rent/mortgage, utilities, insurances, and car expenses), and then add 10% as a buffer.
Then times that amount by 12. This should cover 3 months’ worth of living expenses and give you time to catch up to find a job or cover any waiting period whilst applying for insurance/Centrelink, should you lose your income for whatever reason. Once you have that minimum emergency fund foundation in place, work on bumping it up to 6 months’ worth of living costs. An ideal emergency fund should cover you for between 3-6 months, a good emergency fund for between 6-9 months and a fool-proof one would keep you going for 9-12 months, giving you some breathing space and reducing the financial stress, regardless of external financial circumstances.
Using a Credit Card for Emergencies
Why shouldn’t you just use your credit card instead of spending so much time and effort saving? First and foremost, if you already have a bad credit rating, a history of missed payments, and you are struggling to pay a debt or struggling to pay bills - you might not even be eligible to borrow more money! Further, financing an emergency with a credit card can cost you extra fees (such as establishment fees, ongoing fees, and interest), and what’s worse is that those who can’t get credit from regular lenders such as banks and credit unions often fall into the trap of financing with payday lenders (aka. loan sharks).
These vendors bank on people’s inability to pay on time and typically lend to people trying to borrow with bad credit, charging exorbitant fees and interest against the small amounts they loan out. However, those fees can quickly add up, meaning the unfortunate people who feel they have no choice but to turn to this as a debt solution pay a heck of a lot more than the amount originally borrowed. The bottom line is simple - trying to use a credit card or credit facilities as an emergency fund is like using a weighted vest instead of a lifejacket when you are already drowning in debt!
Emergency Insurance for Physical and Financial Protection
The lack of an emergency fund can also impact your health in more ways than mere financial stress – you never know when you might need to pay for a health emergency! Experiencing a health crisis such as being in a serious car crash and not having health insurance, or finding out you urgently need expensive medical treatment such as chemotherapy is hard enough - let alone not knowing how you will be able to pay! It is therefore important to think of your emergency fund like your own personal financial insurance - it covers you just if things go bad and protect your wealth! Imagine how you would feel if you worked so hard to earn your house, car, and investments – to then have to sell those assets to pay off debt or finance your short-term cost of living.
You may lose your job in a downturn, but you still need to continue with life’s expenses. If you have your savings invested in assets, quite often, you cannot or will not want to liquidate your investments because asset prices can be volatile, and you will lose money by selling below the asset’s intrinsic value (as asset prices usually dive in a downturn). Ideally, you want to sell your investments whilst in a position of strength, rather than when you are desperate for cash to cover next month’s bills. If the advice above is followed, your investments will be protected by your “rainy-day” emergency fund because it’s a matter of WHEN bad stuff happens, not IF.
You might be scratching your head trying to figure out how you’re supposed to save an emergency fund when you’re in the red, or there’s almost nothing left in the kitty at the end of each month. If this sounds like you, check out our article: How to Check Your Budget in Five Easy Steps, to help you critically analyse your budget and figure out where you can save in your weekly budget. Also, consider the possibility that you will receive a tax refund this end of the financial year or ways to save extra cash in an everyday account by being generally thrifty.
If you contain the temptation to splurge your hard-earned dollars on consumer goods, you can instead make that money work harder for you as the basis for building your emergency fund! Another great strategy for saving an emergency fund and keeping track of your finances is by downloading a budgeting app, which can objectively and automatically help you get on top of debt and money in general!
Getting your spending under control is fundamental to succeeding with your emergency fund goals. Even though you may have created your budget already, we are often not completely honest with ourselves regarding actual spending. These days, most people do their internet banking (and online shopping) from an Android Smartphone or Apple iPhone anyway, so what’s the risk in trying – even if for a month! The top three FREE budgeting apps that we recommend downloading in 2021 are: “Up”, “MoneyBrilliant” and “Pocket Book.”
These apps sync to your bank account to create a profile of your personal finances, help you set spending limits and savings goals, automatically categorise spending to check that it is in line with your budget, and even allow you to round up transactions and have those funds deposited into a savings account automatically! Say goodbye to boring old spreadsheets and say hello to stressless, seamless money management (and your new emergency fund)!
Grow Your Wealth in Small Increments
In addition to building an emergency fund, you can also build your wealth with the power of technology! Remember piggybanks and the satisfaction of slipping the day’s loose change into the slot… and then opening it and excitedly counting every cent! Fortunately (or not), with electronic transactions now dominating almost the entirety of our spending, loose change is a dying commodity – but the humble piggy bank doesn’t have to be! Like the budgeting apps mentioned above, the “Raiz” app automatically rounds up each purchase you make on a linked debit card to the next dollar and invests this “loose change” into one of six diversified investment portfolios. You can also set up regular contributions or make one-off additions to your portfolio.
Investing can feel like an unreachable goal when your focus is building an emergency fund, but even if you are only investing a little at a time – that ultimately puts you ahead of the game financially! Not only this, but the average person is unlikely to succeed by picking individual stocks, so the beauty of micro-investing in diversified index funds (such as those operated by companies such as Raiz) is that you own a tiny portion of a collection of blue-chip (well-established companies that are considered to be a reliable investment).
If you are currently in financial distress, debt collectors and creditors are chasing you for money, and you are unsure how to get yourself out of a bad debt situation (let alone start an emergency fund or begin investing) – today is the day to call us. We specialise in counseling people struggling financially to help them get back on track and find a solution for bad debt. We offer an obligation-free consultation and can help you go through your budget, income, and expenses to figure out your current financial capacity, and then based on your current debts, we can help you figure out a course of action to get out of debt and move forward with your life. It doesn’t need to be a struggle – call 1300 003 328 to get started on your debt-free journey.