How much should I keep in my emergency fund?

It’s the old school “money for a rainy day”!

Many people always ask me two questions:

1. how much should I have in my cash reserve (emergency fund)?; and

2. what is an emergency?

How much in the fund?

  • if you're an employee - you would aim for 3 months of expenses

  • self-employed, up to 6 months

This is really governed by your own comfort level. Savings for holidays or additional debt repayments are not expenses that would include (FYI holidays are actually luxuries!).

Just your weekly blow account and bills account are your expenses, including rent or minimal debt repayments.

Every situation is different. If you're an employee but have a family and relatives overseas - you may beef your 3 months up with enough to fly the whole family back home.

What is an emergency?

  • car insurance excess

  • major car breakdown

  • dental emergency (like bite down on food and snap your tooth)

  • hot water system

  • bail for a friend who had a huge weekend (prob not tho)

  • anything else you do not budget for with your spending plan 

 What is not an emergency?

  • holiday

  • new lounge

  • new car

  • new Bose headphones

  • new clothes

  • anything you can plan for

Where do I keep my emergency fund?

I keep mine in an online bank account that I can't transfer on my phone or the same day. Most emergencies you don't need the cash the same day. I do also not use my offset account as I would just spend it. It's out of sight out of mind.

Should I invest my emergency fund?

No. This is a self-funded emergency fund and should remain in your cash account. You only get a small amount of interest and that's OK. The point is the money is "at call" which means there when you need it. You do not want this invested as if you need the cash, the market could be down and not the full value OR it could take 3-5 days to have the money clear into your bank account.

When do I make my emergency fund?

The first thing you do on your money journey. It is a foundation in your financial life. You would do this after you have cleared debt (first keep a $2k emergency fund as a starter). Once you have cleared your consumer debt (credit cards & personal loans).

I've got my emergency fund, now what?

  • You could technically speak to your adviser about moving your income protection to a 90-day waiting period, as you can "self insure" the first 3 months of an accident or illness, this will reduce your premium.

  • If you do not have your personal insurances set up, you need to factor this into your spending plan.

  • Once you have your emergency fund set up & your insurance plan sorted - you can then start your investing journey or go and get those financial goals!

Anything else?

If for example you are saving for a first home you would not count your emergency fund as part of your home deposit!

Starting an emergency fund is a great way to build savings habits.

Hope this helps!

Glenny J.