Your Emergency Fund: How Much Do You Really Need?

Setting up an emergency fund is one of the first things that you should do to get organised financially.  Having one gives you peace of mind and allows you to feel secure that you’ll have the money there when you need it.

But how much money do you actually need in your emergency account?

While it will vary depending on your lifestyle (for example a university student will need less money than a family), generally I recommend that you set up a high interest account and keep $2,000 in it.

$2,000 is enough to cover any emergency expenses that should crop up in the year, such as the dishwasher kicking it or having to get your tooth fixed after it get’s knocked out during a soccer match (don’t laugh – this happened to a friend of mine).

If you are like any normal family, you’ll find that you probably need to dip into it around twice a year (hopefully not more often than this).

So how do you set one up?

If you haven’t already I recommend getting a high interest account that is easy enough to access in an emergency, but not so easy that you are tempted to buy a new Kardashian handbag when you see one.

Most of the big banks now have online only accounts that you can link to your regular savings account that have a decent interest rate, otherwise use the usual suspects like ING Direct’s online saver account.

At the time of writing, ING Direct’s Savings Maximiser is 6.35%, and ANZ’s Progress Saver is 6.0%.

Saving for the $2,000 to put into it.

Now I like saving’s goals, I think it makes the game of saving far more achievable (or it could just be that it brings out my competitive spirit) but getting to that $2K for your emergency fund should be a priority so you can start to get ahead financially (yes even BEFORE you start to pay off your debts – I’ll get to that soon).

So scrimp and save (or do a 30 day spending detox where you stop spending on anything unnecessary for a month) and you should be able to get to that amount within a few months.

(as long as you don’t have any emergency’s during that time of course )

Then just let it sit there quietly earning interest until you need it.

Topping it up

Then when you do need to use it, make it a priority again to top it up to the full amount.

Do you really need $2,000?

Generally most families will, yes.  But if you are a single or uni student then you probably need less and could get away with $1,000 for a single, or even just $500 for a uni student.  Be aware though that uni student’s aren’t immune from emergency’s such as car breakdown’s which can cost a lot so if you CAN afford it, try and get the full amount in your emergency account.

So that’s it.  Setting up your emergency account with two grand.  Your first step to financial freedom.

Next post: Paying off debt – in which order do you do it?