With more Australians living from one paycheck to the next than ever before, the concept of an ’emergency savings’ fund can feel out of reach for many.
But it doesn’t have to be that way.
Australian financial expert Canna Campbell believes having emergency savings set aside for those things that pop up ‘out of the blue’ is essential for everybody – and it can be done in just five easy steps.
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Australian financial expert Canna Campbell (pictured) explains why it’s essential to have emergency savings and the best way to go about creating the account
1. Open a separate dedicated account
While you might already have a savings account where you’ve got money put aside for a holiday or for some other goal, this isn’t the same as having emergency savings on hand, says Canna.
If you are just starting, the founder of SugarMamma TV recommends opening a separate, dedicated Internet savings account, which is linked to your every day account.
‘Ideally, you don’t want an ATM card attached to this but it should be Internet-based so you can get some bonus interest,’ Canna said in a
Unexpected costs can derail you and leave you turning to loans or credit cards as a way of coping (stock image)
2. Nickname your account
Once your account is open, the financial expert advises naming the account Emergency Life Money in order to reflect its purpose.
‘The reason why this nickname is so important is to remind you what it is for and to remove temptation.’
She said if you don’t remind yourself why you have the account in the first place, it can be easy to allow funds to build up only to find yourself tapping into these for other things.
First things first: Open a separate dedicated Internet savings account which doesn’t have a linked ATM card
3. Put any amount of money you can into the account
If your budget is already stretched to its limit, saving a little more can feel tough.
But even if you can only start with a few dollars each week, Canna believes doing this is better than doing nothing at all.
‘Every time you get paid, as a priority, you put some money into that account, and you continue to do this on a regular basis.
‘Even if it is $1, $10 or $1,000, keep building it up and if you ever need to withdraw some money for an emergency, make sure you top it up as soon as possible.’
All manner of unexpected things can happen in life which can end costing more than you’ve budgeted for (stock image)
4. Decide on how much you need as a potential buffer
While there is a rule which suggests you need at least three months’ worth of living expenses accumulated in a savings account, this rule doesn’t apply to everyone.
The expert said depending on your circumstances: if you are an in a job that could be made redundant, or have people who are dependent on you, you may need more in your emergency savings.
On the other hand, if you have a lot of annual leave accumulated or don’t have high living expenses, you may need less.
‘So you really need to look at your unique situation and ask yourself what sort of emergency could happen to me in the life that could knock me off my path financially?’
‘And as your financial situation naturally evolves through the life cycles, make sure you always reassess and ask ‘Have I got enough money in my emergency account?’
Canna believes it’s important to access your life situation in order to decide just how much money you need for an emergency fund
What is an offset account?
An offset account is a savings account or transaction account linked to your home loan account.
The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.
5. Know how to make emergency savings work if you have a home loan
If you have a home loan, don’t put your emergency money into a separate dedicated savings account, advises Canna.
Instead, she recommends paying down your savings with extra savings, and using funds from your mortgage to cover any unexpected expenses, should the arise. You will need to have your redraw facility switched on to allow this.
Another option, Canna said, is to ask your bank to open an offset account for your money – although this isn’t an option she suggests.
‘I believe one of the dangers of having an offset account is it makes people feel warm and fuzzy when they see $15 or 20,000 in their offset account because it gives them a false sense of security thinking they have lots of cash.
‘You have to focus when paying off your homeloan. People tend to take their foot off the gas and not work as hard, or ease up on their budgets and their financial goals.
‘I personally recommend the redraw option over an offset account.’