Why you need an emergency fund

Financial experts agree everyone should have backup money, in case you face a financial emergency like an urgent car repair, or an unexpected vet bill. But how much should you have?

Why should you have one?

Tom Hartmann, managing editor at the Commission for Financial Capability (CFFC), says having a savings buffer can really help in times of emergency.

If you don’t have any money you can get your hands on in an emergency, you might be tempted to use a credit card or, worse, a high-interest ‘pay day’ loan. Hartmann calls this “crisis borrowing”.

“When we’re borrowing in a crisis, usually we don’t make very good decisions, and our options are limited. You can start digging yourself into a debt hole that’s very hard to get out of.”

What amount should you aim for?

Hartmann says the CFFC recommends people have three months’ worth of expenses set aside in an easily accessible account.

To calculate this, work out how much you would need for three months to cover all your bills.

Your expenses might be less if you’re not travelling to and from work, and you might be conscious of not spending too much.

Help, I can’t afford to save that much!

Are you reading this thinking, “There’s no way I could ever save that much.”

Hartmann says you should first aim for a safety net of NZ$1,000.

To reach this, you could take on a bit more work, or sell some things around the house, he says.

“It’s OK to start small and build it up over time. Set aside NZ$5 a week. Give it a year or two and you’ll get to somewhere where it can make a meaningful difference.”

Can’t you just use your credit card?

Hartmann says when you use a credit card for the first unexpected expense, another might crop up while you’re still paying off the first.

“That just reinforces the cycle of debt, which has expenses and fees that come with it, and it’s hard to get out of.”

Get mental clarity

Hartmann says research shows savings buffers can free up your headspace – you’ll be free from worrying about money.

When you have some savings, you have a lot more options when the unexpected happens, he says.

“And the unexpected really isn’t unexpected. We know that something is going to happen. We don’t know when or what, but it’s part of life.”


Story by Claire Connell, JUNO

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