An emergency fund for a rainy day will give you security and confidence. Photo / 123RF
THREE KEY POINTS:
Sarah Ashby is a Wealth Management Adviser at Jarden in Tauranga.
OPINION
Life is full of uncertainties, and unexpected financial challenges can arise at any moment. Having an emergency fund is one of the most essential financial practices you can adopt, providing you with access to cash when you need it most.
What exactly is an emergency fund?
It is an amount of cash that you know you have relatively quick and easy access to when you need it. An emergency fund can help you prevent debt or tapping into your savings when you face a sudden and unexpected financial challenge, giving you the confidence of a security net for stressful moments that you may face in life.
By having an emergency fund, you don’t have to rely on credit cards, loans, or other forms of borrowing to cover unexpected expenses, avoiding the risk of falling into a debt trap.
This isn’t to be confused with a rainy-day fund, an emergency fund is not a luxury, but – ideally - a necessity. A rainy-day fund is for impulse purchases, spur of the moment getaways, or helping friends or relatives in need.
On the other hand, an emergency fund is for safeguarding your financial stability and wellbeing in times of crisis. Instead of cash is king, think cash management is king.
You might be pleasantly surprised by what options are out there, such as high- yield savings accounts and Cash PIE funds. An emergency fund is no good to you if you can’t access it in a time of emergency, so these are not funds to invest in long-term fixed products or growth assets.
Why?
Some emergencies that people may face include medical emergencies, sickness or harm, losing income, or sudden geographical events that create financial difficulties. While you might have insurance for some of this, it may not be sufficient to fully replace what you have lost.
You can also use your emergency fund as a buffer for your budget in times of hardship and adjust your spending and saving habits accordingly. This can help you stay on track with your financial goals, such as buying a home, paying off debt, or retiring early.
How much do you need in your emergency fund?
An easy way to estimate how much should be in your fund is to ask yourself how much would you need to get by for three to six months if you were suddenly unable to earn your income?
This will provide a buffer, enabling you to maintain your financial goals and lifestyle during periods of hardship. This amount is a goal, and setting up a fund with any amount is a step in the right direction.
Who needs one?
Everyone should consider having an emergency fund. If you don’t have one, and you’re able to, you should make it a priority to start building one. It’s a step towards financial wellbeing and offers peace of mind - enough reason alone to start building.
This is the first step to strong financial wellbeing. Once in place you can start to think about short term and even longer-term goals. You will have peace of mind that you can start to consider volatility and creating growth because you will know that you will have your emergency fund to fall back on.
If you want to build a solid financial foundation, start by setting up an emergency fund today. Working out a budget, settling on a realistic amount to cover expenses, committing to regularly transferring surplus cash, and removing visibility of the account so you’re not tempted to touch it. This will give you the security and confidence to face any challenge that life throws at you.
DISCLAIMER: This research has been prepared by Jarden Wealth Limited (Jarden) which holds a licence issued by the Financial Markets Authority to provide a financial advice service. The information in this research solely relates to the companies and investment opportunities specified within. For a full publicly available disclosure statement, see https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
No surprises in another thin year for the sector.