7 Reasons You Need an Emergency Fund

Sun Jan. 26th 2020

Being financially prepared for the unexpected with a healthy emergency fund is a cornerstone of managing your finances. And here's the inconvenient thing about emergencies - they don't discriminate. You might have a stable job and enough income today, but those factors won’t protect you completely from financial catastrophe tomorrow.

Oscar Wilde said "To expect the unexpected shows a thoroughly modern intellect". Modern in today's world? Maybe. Financially responsible? Absolutely!

Being financially prepared for the unexpected with a healthy emergency fund is a cornerstone of managing your finances. And here's the inconvenient thing about emergencies - they don't discriminate. You might have a stable job and enough income today, but those factors won't protect you completely from financial catastrophe tomorrow.

So what actually constitutes a financial emergency?

Typically there are 2 categories an emergency fits into:

1) An unexpected event occurs whereby you have to spend money immediately to get through it, such as paying out for a rescheduled flight to get home, losing your house keys and having to replace keys and locks, or your car needing a new battery.

2) A loss of income emergency – for example being fired or made redundant, having your hours reduced, or having to take a pay cut.

Experts recommend having enough cash on hand to cover 3-6 months of non-negotiable living expenses (such as rent or mortgage payments, food, and basic transport) to keep you afloat through a sudden loss of income or financial emergency. Even though this advice is fairly well known, New Zealanders still have trouble maintaining their cash savings. According to analysis by Finder (a comparison website for financial products) New Zealanders are predicted to save -1.23% of their disposable income in 2020 which means they'll be spending more than they earn! With an average disposable income of $36,148 Kiwis are expected to spend an extra $445 they don't have.

The following are seven reasons why you might need to have a store of cash on hand:

1. You own a car and/or a home

Accidents happen, and accidents involving cars and homes can be pricey.You might get some help from your insurance policies, but you'll still have to payexcesses and any premium increases that arise after your claims.If you do have the spare cash available, it'll give you the option to skip making a claim and instead pay for the repairs yourself - which may be the right move if you're worried about getting dropped by your insurer or seeing your premiums skyrocket.

2. You have one source of income

No one really expects to lose a job, but it happens. Employers go out of business, downsize, restructure, and change directions. An OECD report published in 2017 says 29,000 New Zealanders reported being laid off, made redundant, or dismissed from their previous job.Even if your job feels stable today, tomorrow's circumstances could be quite different, and in a country where there's no mandatory notice period and little government support to help people back into meaning employment, losing a job can have significant financial and emotional consequences.

Your emergency fund serves two purposes when you lose your job. Primarily, it allows you to cover your bills without taking on debt, but it also provides breathing room so you can find your next good job opportunity. It'll be far easier to interview and evaluate your options when you aren't desperately watching your bills pile up

3. You have family

A family member who has a sudden illness or injury carries financial implications, even if you're not responsible for the medical bill. If that family member lives in another area of New Zealand or overseas, you may find yourself planning last-minute travel and taking unpaid time off work to help care for them. You'll appreciate having funds available in that scenario, so you won't have to weigh the expense of the trip against the severity of the health issue.

4. You use credit cards

Using credit cards for every purchase might earn you cash-back rewards and even out your monthly cash flow, but it also puts you at risk of identity theft. If your card number is stolen, you'll have to cancel that card immediately and wait for a new one.

In the meantime, you could use your emergency fund to put petrol in the car and buy your groceries - without having to worry about overdrawing your checking account.Usually the card replacement process only takes a few days, but it could be longer depending on the circumstances of the identity theft.

5. You already have debts

Fitch Ratings reports that this country has one of the world's highest household debt levels, at 93% of GDP, so this is one that will likely be meaningful to many of us.

If you find yourself in a situation where you have to pay an unexpected vet bill your debts are still going to need to be paid. These won't go away just because you've encountered unexpected costs one month.Paying off your debts should always be your main priority, and these commitments should never be side lined so that you have money available to pay for other things ''just this once''.Finder's research showed 17 per cent of New Zealanders said they could not manage their finances without a credit card, further suggesting that few of us have an emergency fund in place and turn to credit cards to pay for the unexpected. Having an emergency fund means you can continue to meet your important financial obligations and will also reduce the need for you having to borrow even more to cover the unexpected.

6. You are working towards a goal

If you are working towards a financial goal such as buying a car or your first home, orare nearing retirement it's likely you will already have a very strategic savings plan mapped out. Facing an unexpected bump in the road could result in you having to dip into those savings and end up derailing these goals.

Whilst it may seem counter-productive to save for anything other than your main goal, splitting money across two different savings accounts will mean you know exactly what money is ear-marked for what reason, and as you are holding them with a purpose it will eliminate the need to unexpectedly withdraw large chunks of cash from your main savings account.

Think of your emergency fund as an insurance policy that protects you from having to move backwards with your future goals.

7. You are open to new opportunities

An emergency fund can help you in positive situations, too. Dream job opportunities aren't always convenient. A job offer in another country might require you and your partner to survive temporarily on a single income, or a role in a different industry you've always wanted to break into might mean a lower salary in the beginning. Having cash on hand gives you the flexibility to pursue those life-changing opportunities when they come knocking.

Top Tips for building your funds

An emergency fund needs to be good to go with a moment's notice (the clue is in the name, after all!) Most people use a bank account at the same bank as their chequing account as this makes it easier and quicker to transfer funds between accounts, however it's important to make sure that your emergency funds aren't linked to an EFTPOs or debit card as this increases the ability to dip into those funds for non-emergencies.

Save regularly and be patient! Skimming just $25 a month off your current non-essential spending (things like dining out and entertainment) will save you $1300 within a year. Set an amount to save and stick to it – you'll soon see your balance grow and will feel in control that you have those unexpected nasties covered.

Bank the savings! If you manage to save some money (by getting a lower premium when you renew your car insurance, or by cancelling those unread magazine subscriptions for example) consider putting this extra cash into your emergency fund. Likewise, if you know you have a tax rebate or pay rise coming up, divert some or all of this extra money to your emergency account – you can't miss what you never had!

Cash on hand… just in case

Ultimately, having an emergency fund gives you the flexibility to manage seamlessly through financial upsets and take advantage of life's opportunities - without borrowing on credit cards or cashing out your retirement funds.

Expect the unexpected and start tucking away some cash savings today.

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