When things are going well it can be tempting to assume your luck will continue. But what happens if you get sick or lose your job?
Being financially prepared for an emergency is critically important in ensuring you can ride out any unforeseen events, but it is also a helpful strategy in securing the long-term health of your finances and minimising financial stress.
“You need a little buffer to make sure you can deal with unforeseen events,” recommends Greg Pride, financial adviser with Centric Wealth.
Emergencies don’t have to be as life-altering as losing your job – it may just be a broken windscreen on your car that needs repairing or sudden plumbing mishap requiring urgent attention. Having an established emergency fund – or “cash reserve” as described by Pride – can save you from having to rely on your credit card to pay for the emergency, which pushed you into high-interest debt.
How to get started
Pride recommends setting aside a small amount each month in savings to act as a “cash reserve” when you need it, while financial adviser Paul Bineham, managing director of Noall & Co, advises making it part of your monthly payment of bills.
“People always say they’ll save whatever money is left after they pay their bills, but often there is no money left at the end of the month after the bills are paid,” he says. If you treat it like a regular bill, you are more likely to stick to the payments.
Set up automatic deposits
This is one piece of advice every financial advisor will give you – and that’s because it works. Decide on your monthly (or weekly or fortnightly) amount and have it automatically deducted on payday and deposited into a high-interest savings account, which accrues interest on the growing balance at a higher interest rate than a regular transaction account.
“We advise clients to set up an automatic debit before their bills are paid,” Bineham says. “Make yourself a creditor and stick to it like any other bill.”
It is a lot easier to save when you don’t have to think about it.
If you are struggling to find leftover money to deposit into your emergency fund, it may be time to re-examine your spending. Keep track of all your expenses and look for areas you can trim – too many dinners out perhaps, or an unused gym membership?
“If you have an accurate record of your spending, it becomes apparent where a problem may be – it may be technology-related, it may be leisure-related or it may be clothing-related,” Pride says.
Top up with one-off extras
Instead of spending your Christmas bonus, tax return or any other unexpected windfall right away, deposit the extra cash into your emergency fund. You’ll enjoy a higher interest paid on your balance and you won’t notice any money going missing. This will help you build your emergency fund faster.