Emergency fund - for when the unexpected happens

Everything is ticking along nicely until suddenly it isn’t anymore – you lose your job, the car breaks down, the roof is leaking after that big storm and you finish off your day by knocking your coffee across the laptop keyboard. The combined financial impact of these accidents is huge, and in an ideal world you’d cover the costs with money from an emergency fund instead of a credit card or personal loan.

Building and maintaining an emergency fund is the second step in our plan for building a solid financial foundation.

What’s an emergency fund?

An emergency fund is cash you have set aside for the day a financial emergency presents itself. Financial emergencies arise when your regular income and bank balance don’t cover essential expenses (like mortgage payments) due to unforeseen financial costs (like losing your job).

What it’s not

As the name suggests, it’s for emergencies only. The unpredictable. There are some planned expenses you should be saving for separately, such as school fees, regular insurance or household utility bills. You should save for these in a completely separate account, ideally one with a high interest rate, and one you don't use on a daily basis.

How much do I need in my emergency fund?

It really depends on your specific situation. Whether you have children, existing debt (like a mortgage or investment debt) and types of insurance cover all play a part in determining the amount that’s best for you:

• A healthy person or couple without dependants, who live well within their means, should have three months of living expenses set aside.

• Working parents with children should probably have at least six months of living expenses stored in their emergency savings. This also applies to people who have variable or commission-based income such as small business owners.

• Families with one income earner or health issues and retirees facing higher risks, should consider having at least six months worth of cash stored away.