How to set up an emergency fund

Money is often a cause of stress within households and one way to help reduce this stress is to have a solid emergency fund set aside in case of any unexpected emergencies. An emergency fund should be able to pay all of your non-discretionary expenses for between 3-6 months (12 if you are conservative).

Let’s have look at how to set up an appropriate emergency fund.

Review your expenses.

List down all the re-occurring expenses you can think of and work out how much they cost each month. These expenses should include:

  • Mortgage repayments/rent
  • Utilities such as power, gas and water
  • Council rates and land tax
  • Phone bills and internet
  • Car repayments, registration, maintenance and fuel
  • Subscriptions such as Netflix
  • Gym and other memberships
  • School fees
  • Health insurance and medication
  • Home/car insurance

Once you have listed all your expenses and their monthly cost, add them together to work out your monthly expenditure then multiply this by your desired emergency period e.g. 6 months.

For example: John spends $3,000 per month on his essential living expenses. John would like a 6-month emergency fund. John needs $18,000 in his emergency fund.

Build your fund

Now you know how much you need in an emergency fund, it is time to build up your fund. Work out how much spare money you can put aside each month without majorly impacting your life and start a savings plan.

John can save $1,500 per month, it will take john 12 months to build up his emergency fund to $18,000.

Secure your fund

Now that you are starting to put money aside for emergencies, you will need a secure place to put it.

If you do not trust yourself to leave the money alone than it is a good idea to set up a separate bank account with another bank and make sure that you do not get a bank card. This will ensure that your fund is not easy to access with impulse purchases.

If you trust yourself to leave your emergency fund alone, it may be a good idea to keep the money in an offset account for your home loan or a high-interest savings account.

Interested in Financial Independence Retire Early? Join the discussion at Chatting FIRE forum.

Leave a comment