How to build your personal emergency fund

Welcome to a new year (and a new decade). Remember old habits don't usually take us to new places.

Hopefully this year you’ve decided to set some family goals and get a little more proactive on achieving some saving goals.

One of the challenges of a busy life can be we keep our ideas and hopes about our personal money goals locked in our heads, rather than writing them down where we can see them, talk about them and maybe even ask about our progress to achieve them.

Jump Ahead

Savings goals: Where to start

So you’re ready to set or update your family's financial goals for this year? Awesome! Your next step (or your first savings goal) is to set up your emergency savings fund.

• All the planning and good financial advice in the world can’t help if you’re not prepared financially.

Savings goals: Where to write them down

Last year we made a Quick Family Financial Goals checklist you can download, print and attach to the fridge - the place where most family members meet.

This one-page document can be used to help start your thinking about financial goals - small, medium and large - and how to see them in a timeline and saving timeline.

A personal money goal that's not in writing, is probably more a flexible wish.

Think you don’t need one?

Here are some questions to start your thinking about whether an emergency fund is needed.

• Would an unexpected $1,500 expense throw off your budget in a big way?
• Could you live for 90 days without an income and still manage to pay the rent, the mortgage (credit cards) and the school fees?
• If your fridge broke down in the Australian summer, could you replace it tomorrow without needing to increase your personal debt?
• Would the cost of an unexpected trip to the Vet and surgery on your dog (argh!) land on your credit card?
• And my personal favourite, If the engine in your car died, would that kill your budget too?

If you answered ‘yes’ to any of these questions, you need a personal emergency fund.

How much do I need?

Setting and meeting a goal helps to grow a good habit (and sometimes achieving the goal is more important than the size of the goal).

So start with mini-goals:

• Start by saving $1,500.
• Then add to it until you have one month of expenses saved as well.
• Your ultimate goal is to set aside 3 months of your expenses.
• Then when you’ve reached that goal, aim for 6 months of your expenses.

The aim is to be able to meet at least 6 months' rent (or 6 months of mortgage repayments) and all the living expenses that are needed to help make that happen. You can read more about How much should I have in my emergency savings fund? here.

Single and self-reliant

Single people are keenly aware of the risk of becoming sick or even disabled.

Being single and self-reliant means you generally have to save more in your emergency savings fund, be careful with your long term health and have a higher amount of disability insurance in case you get sick or injured and can't work temporarily or lose your ability to earn your income long term.

You may want to save more than 6 months of expenses if you’re the sole breadwinner or have an unpredictable income.

If you’re just getting started, don’t get hung up on the big number. The important thing is to just get started - just focus on creating good habits.

How to recognise an emergency (or he’s how I explain it to little Miss 5)

What does an ‘emergency expense’ mean to you?

Here are three questions to ask. Is it:

• Unexpected,
• Unavoidable and/or
• Urgent?

Examples of these include:

• Unexpected: You’ve lost your job and need to pay the bills.
• Unavoidable: It costs more to fix your dead refrigerator than to buy a new one.
• Urgent: Your dentist just advises you to get root canal surgery rather than risk losing a tooth in the front of your mouth.

What does not qualify for an emergency fund bailout:

• A new IKEA sofa, even if it’s on sale (or in the reject section and really marked down in price).
• Tickets to the grand final of anything, or mag wheels for the car with low profile tyres, or
• Anything from the Bunnings Hardware New Year Sale catalogue over $500 (just saying).

Those aren’t emergencies; get into the habit of keeping the financial promises you make yourself.

Where should I put emergency fund money?

When it comes to putting your emergency savings fund somewhere - out of sight - is a good idea - liquid and accessible (but not too accessible).

Make it work for you - put this in your mortgage offset account. But if you’re living from your same account, put it somewhere else that's not viewable in your phone banking app. Try a Credit Union or a high-interest term deposit, accessible from online access but perhaps not an ATM.

You know how you relate to money, so play to your strengths and remove the temptation to raid the piggy bank.

Develop the get-ahead skill of savings for something and delayed gratification - your kids will learn a powerful skill from watching your behaviour.

A quick word about Afterpay and other buy-now-and-pay-later credit services.

Afterpay is a buy now and pay later service (some have said it is a gateway drug to credit cards and payday loans) that lets people pay off a purchase amount over 4 payments or risk a fee. Interestingly the average Afterpay amount being financed is a $150 purchase.

What are you really taking home with a buy now and pay later service?

While you may be able to take it home now and pay later, what you actually get to take home is a growing expectation that everything is (or should be) available to everyone immediately.

• Ask any parent with a toddler aged two and a half, what this really does to future expectations.

What you don't take home is the learned skill of learning how to save and how to manage the feeling of delayed financial gratification - old school patience.

Using a credit card to finance your emergency

Unless you have a zero balance on your credit cards, it’s best not to ‘finance’ your emergency by adding to your existing debt.

If you take out a loan (remember you may not qualify if you’re sick or unemployed or the economy has faced another GFC), you’ll likely have to repay the loan with interest, fees, and maybe even penalties, which is a drain on your money at the very worst of times.

Using a credit card as your emergency fund only risks pushing you deeper into a debt hole that you will need to climb out of later. Drew Browne

Two suggestions on how to get started (or get ahead more)

Here are 2 options to fund your new emergency fund.

Automate it. Have an amount of money directly deposited from each paycheque coming into the home into a savings account. If you set aside $25 a week, at the end of 2 years you could have $2,600 saved. If you save $50 a week (pizza money) you'll have over $5,000 saved in your emergency fund.

Preplan it. To build it faster, decide that any money from a work bonus or tax refund is automatically marked for your emergency fund. Until you reach your emergency fund savings goal, if you have a surplus of cash at the end of each month, add that, too. (Don't spend your surplus on pizza until you have reached your savings goal.)

Having funds for an emergency can take a huge weight off your shoulders and reduce your relationship stress when you have a surprise expense. This way an emergency expense becomes more of an inconvenience to pay, rather than a reason for an argument with your partner about speeding.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.