Most Kiwis would agree that it’s important to have a plan to weather unexpected expenses or loss of income, although relatively few of us are as prepared as we’d like…
Most Kiwis would agree that it’s important to have a plan to weather unexpected expenses or loss of income, although relatively few of us are as prepared as we’d like to be. Urgent house repairs, dentist bills and failed WOFs sometimes get the better of us. An emergency fund is a way of staying afloat during the bad times - a stash of money that you set aside to cover financial turbulence. On its face, saving for unexpected costs sounds sensible - but is an emergency fund really necessary? Let’s take a look at the best way to prepare for a rainy day.
Emergency Funds: A Primer
Building up an emergency fund usually involves earmarking some of your paycheck each week for truly unexpected expenses - essentially, costs you had no idea were coming and couldn’t budget for. Expenses such as routine home maintenance, healthcare costs and car bills should be included in your budget, so an emergency fund is not designed to cover these. An emergency fund needs to be good to go with a moment’s notice, so most people use a bank account at the same bank as their chequing account - although the emergency fund is not linked to an EFTPOS or debit card, it’s simple and quick to transfer funds across.
Why maintain an emergency fund?
Aside from keeping you afloat during tough times, there are other benefits to keeping a stash set aside for emergencies. Crucially, an emergency fund can help you keep your stress levels down. If you are not setting aside money to cover unforeseen expenses, even a small mishap can leave you with an unmanageable bill. With an emergency fund you can breathe easy - a parking ticket or vet bill won’t send your finances spiralling out of control.
An emergency fund also makes it clear how much you really have available to spend. By keeping your emergency savings separate from your everyday spending accounts, you’re less likely to spend those savings on a whim. Some savers even keep their emergency fund at a different bank without an EFTPOS card - this makes the savings a little less accessible in an emergency, but also harder to spend on impulse purchases.
Do I really need an emergency fund?
Dedicated emergency funds took off in the US, where healthcare costs are high and employment protections are often limited. Here in New Zealand, we’re fairly well protected by employment law and the public health system, so our emergency funds will typically be much smaller. If you have a mortgage, you may not need an emergency fund at all - keeping a small, paid off portion of your home loan as an offset or revolving mortgage provides you with a line of equity to take care of financial emergencies. And if you have high interest debt, consider paying this off instead of building a large emergency fund.
If you’re looking to get your finances under control, an emergency fund is a great way to breathe easy rather than worrying about the next bump in the road. If you’ve got larger expenses to cover, a personal loan from Harmoney may be a simple way to make it happen. Learn more today at www.harmoney.co.nz
