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Building Your Emergency Fund

You should always expect the unexpected! You can be prepared for the unexpected by having an emergency fund set aside. An emergency fund is the best defence against a financial emergency so over the next four weeks, Wednesday being Finance day, I'm going to explain the why, how, what and when of an emergency fund.
Many people doubt they can afford to start, build and maintain an emergency fund. The truth is you can't afford to not have one.
A financial emergency could be an car or home repair, urgent medical expense, job loss, death or anything else requiring a significant amount of money on short notice.
Unfortunately, these challenges force many people to deal with the situation by using credit cards or taking out a loan. This simply makes the situation even more challenging in the long-term.
How Much is Enough?
The general rule is to keep between three, preferably six months of living expenses in a readily accessible account. Of course, that's just a general rule. Twelve months of living expenses in today's economic climate is a better goal. The proper amount for you will depend on your specific situation. Just remember, no two situations are identical and what would be enough for our family may not even come close for yours.
Consider if children are part of the equation. How much debt are you currently carrying? What types of insurance cover do you currently have? The answers to these questions will allow you to make an informed decision about the size of your emergency fund.
Sudden loss of income is the most common reason for needing to dip into an emergency fund. If there is a job loss, bills still need to be paid. Finding significant employment can take at least a few months. Current statistics show that if you are aged over 50 it takes an average of 72 weeks to find employment - any employment, not just in your field of expertise. You don't want to be caught without an income and without money in savings!
Australians have the safety-net of unemployment benefits but believe me when I say it is not enough to cover your mortgage, your daily living expenses and your household bills.
It is always best to have a plan in place for the worst-case scenario. It's easier to handle the smaller emergencies, like having to replace a refrigerator or get the car repaired from your general savings.
But situations will arise. It's simply part of life. And some of them will cause you major financial hardship. And that's when you will appreciate the peace of mind and security of a fully funded emergency fund.
Being Prepared is Always More Pleasant Than Being Caught Short
Paying down debt is important; building your emergency fund is more important.
Now before you roll your eyes and think I don't know what I'm talking about, stop. Read the rest of this very long page, and remember: I've been there. I've been broke. I've conquered debt. I do know what I'm talking about. Then, and only then, can you decide whether you want to tackle your debt the way I did, or find another way that will suit you better.
Here's my reasoning: when you put all your spare cash into a debt payment push you do pay down debt quickly, BUT you have no buffer, no safety net, for when things go wrong. And go wrong they will.
For example if you are putting everything into paying off debt and the fridge blows up, that's not so bad. Sure, you'll need to resort to credit to repair or replace the fridge, but that's only a relatively small amount of money. You can use your credit card or get a loan. You'll have increased your debt load, and put that emergency fund back a couple of years, and you'll be paying interest on the loan, but you'll have your fridge (and it would be so much better if you were already budgeting for a replacement fridge, or at least had some money in an emergency fund).
Think though, about what would happen if you have all your money going towards paying off debt and Disaster Strikes. You have debts, including a mortgage, that you have been paying down quickly. Then you lose your job. Your spouse or partner loses their job. The house is half-torn down so you can renovate. You already have a couple of kids. And then you find out you're expecting a third. And you have no money in the bank, no savings to fall back on, because you've been paying extra on those debts.
You are always wiser to focus on building even a small emergency fund, even if it is just one month's living expenses, because that scenario isn't fictitious, it's real. It happened to us. And it is a horrible place to be.
Many people doubt they can afford to start, build and maintain an emergency fund. The truth is you can't afford to not have one.
A financial emergency could be an car or home repair, urgent medical expense, job loss, death or anything else requiring a significant amount of money on short notice.
Unfortunately, these challenges force many people to deal with the situation by using credit cards or taking out a loan. This simply makes the situation even more challenging in the long-term.
How Much is Enough?
The general rule is to keep between three, preferably six months of living expenses in a readily accessible account. Of course, that's just a general rule. Twelve months of living expenses in today's economic climate is a better goal. The proper amount for you will depend on your specific situation. Just remember, no two situations are identical and what would be enough for our family may not even come close for yours.
Consider if children are part of the equation. How much debt are you currently carrying? What types of insurance cover do you currently have? The answers to these questions will allow you to make an informed decision about the size of your emergency fund.
Sudden loss of income is the most common reason for needing to dip into an emergency fund. If there is a job loss, bills still need to be paid. Finding significant employment can take at least a few months. Current statistics show that if you are aged over 50 it takes an average of 72 weeks to find employment - any employment, not just in your field of expertise. You don't want to be caught without an income and without money in savings!
Australians have the safety-net of unemployment benefits but believe me when I say it is not enough to cover your mortgage, your daily living expenses and your household bills.
It is always best to have a plan in place for the worst-case scenario. It's easier to handle the smaller emergencies, like having to replace a refrigerator or get the car repaired from your general savings.
But situations will arise. It's simply part of life. And some of them will cause you major financial hardship. And that's when you will appreciate the peace of mind and security of a fully funded emergency fund.
Being Prepared is Always More Pleasant Than Being Caught Short
Paying down debt is important; building your emergency fund is more important.
Now before you roll your eyes and think I don't know what I'm talking about, stop. Read the rest of this very long page, and remember: I've been there. I've been broke. I've conquered debt. I do know what I'm talking about. Then, and only then, can you decide whether you want to tackle your debt the way I did, or find another way that will suit you better.
Here's my reasoning: when you put all your spare cash into a debt payment push you do pay down debt quickly, BUT you have no buffer, no safety net, for when things go wrong. And go wrong they will.
For example if you are putting everything into paying off debt and the fridge blows up, that's not so bad. Sure, you'll need to resort to credit to repair or replace the fridge, but that's only a relatively small amount of money. You can use your credit card or get a loan. You'll have increased your debt load, and put that emergency fund back a couple of years, and you'll be paying interest on the loan, but you'll have your fridge (and it would be so much better if you were already budgeting for a replacement fridge, or at least had some money in an emergency fund).
Think though, about what would happen if you have all your money going towards paying off debt and Disaster Strikes. You have debts, including a mortgage, that you have been paying down quickly. Then you lose your job. Your spouse or partner loses their job. The house is half-torn down so you can renovate. You already have a couple of kids. And then you find out you're expecting a third. And you have no money in the bank, no savings to fall back on, because you've been paying extra on those debts.
You are always wiser to focus on building even a small emergency fund, even if it is just one month's living expenses, because that scenario isn't fictitious, it's real. It happened to us. And it is a horrible place to be.
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