Today, we’re going to do a deep dive into an important topic that everyone should pay attention to: the advantages of creating an emergency fund. And now here’s the disclaimer: Please note that this is general information only, and should not be taken as individual financial advice. Everyone’s situation is different, so while this might work for some people, there could be other options that might work better for you.  Take the bits from this article that make sense to you, and ignore the bits that you feel are irrelevant for your situation.

You might be wondering, “Why should I bother with an emergency fund?” Well, let me tell you why it’s a game-changer for your financial wellbeing.

Life is full of twists and turns, and having a financial cushion can help you navigate through tough times without derailing your long-term goals.

Having an emergency fund brings peace of mind. Imagine the comfort of knowing that you have funds readily available to handle unforeseen expenses, like medical emergencies, car repairs, or an unexpected job loss. It also eliminates the stress that comes from high-interest personal loans and credit card debt.

Given the benefits of having an emergency fund, a number of Kiwis still face challenges in saving for emergencies . In a survey by the Financial Services Council conducted this year, 39% of New Zealanders don’t have $5000 saved in case of an emergency. More importantly, more than 1.5 million people couldn’t access this amount within a week without going into debt if they had unforeseen expenses.

Information from Moneyhub, a non-government site offering financial literacy resources, cites that only one in three New Zealanders could last more than a month (financially) if they lost their job.

At a time of high inflation and rising costs of living, data like this shows that something needs to be done so more people can achieve a level of financial resilience.

Now, let’s get into some practical tips for creating an emergency fund. I’ll break it down into easy steps, so you can start building your safety net today.

Tip 1: Set a realistic savings goal.

Start with a modest target, like three to six months’ worth of living expenses, and gradually work your way up. Perhaps you can start with the goal of saving $1000 rather than $10,000. For most people, an extra $1000 is enough to cover minor emergencies like car repairs and unexpected medical bills.

Saving $10 or $20 weekly can easily amount to $1000 within a short period of time, but what we often find is that the culprit often lies in how some don’t stick to their budget and carry on with excessive spending habits. To make an effective budget, take into consideration your bills, rent or mortgage payments, groceries, transportation costs, and any other regular expenses. This will give you an idea of how much you need to cover your essential needs.

Also, it’s important to remember that you will need at least three months worth of your monthly expenses for your emergency fund. However, if you are self-employed or have an irregular income, you may want to save up to six months’ worth.

Tip 2: Make it automatic.

Automate your savings by setting up a direct deposit from your paycheck or a recurring transfer from your checking account to a separate emergency fund account. Contact your bank or financial institution to create a separate account specifically for your emergency fund. This will keep your savings separate from your day-to-day spending and make it less tempting to dip into them for non-emergency expenses.You may automate your transfers regularly, such as every payday so you make consistent contributions to your emergency fund. Start with an amount that is achievable for you and gradually increase it as you progress.

Tip 3: Cut back and save more. 

Take a close look at your expenses and identify areas where you can cut back. Every dollar you save can be redirected towards your emergency fund. Limit dining out and entertainment subscriptions. We’re pretty sure that you can reduce your expenses without compromising your quality of life.It also helps to negotiate insurance bills or shop for cheaper policies.  If you have a credit card and still find it hard to resist spending, you may drop the limit on your card or cancel it altogether. When it comes to your budget, you can also earmark a percentage of your income to pay off any outstanding debt. Start paying off the smallest balance first and then work on the larger ones after.

Tip 4: Stay committed and track your progress.

Building an emergency fund requires discipline and consistency. Use a spreadsheet, budgeting app, or a simple pen and paper to keep track of your contributions and progress towards your savings goal. Don’t forget to celebrate your milestones by giving yourself a small treat. This helps fuel your motivation so you can stay committed in the long-term.Set yourself free from the expectation of building your emergency fund overnight. It may give you short-term pain but the long-term rewards are always worth it.

Tip 5: Consider what not to do.  

When you have finally created your ideal emergency fund, you should still maintain the habit of saving your money. You can use your savings towards a house deposit, investing in shares or funding a personal development goal to boost your career.As much as possible, don’t borrow money for an emergency. Aside from causing stress, the interest charge can put you in even more trouble. 

Tip 5: Consider what not to do.  

When you have finally created your ideal emergency fund, you should still maintain the habit of saving your money. You can use your savings towards a house deposit, investing in shares or funding a personal development goal to boost your career.As much as possible, don’t borrow money for an emergency. Aside from causing stress, the interest charge can put you in even more trouble. 

As much as possible, don’t borrow money for an emergency. Aside from causing stress, the interest charge can put you in even more trouble. Remember, creating an emergency fund is a journey. It might take time, but every step you take brings you closer to financial stability and peace of mind.