Whether an unexpected bill is a minor inconvenience or a major financial problem can sometimes come down to one question: Do you have an emergency fund?

You might know you need the financial safety net an emergency fund provides, but how do you build one, how much do you need, and where do you start?

Here’s what you need to know.

What’s an emergency fund, anyway?

An emergency fund is an amount of money that is there to help you if an unexpected expense comes your way.

If you have to pay for urgent car repairs, for example, having an emergency fund can mean that you can clear the bill without having to take out an expensive personal loan.

If something happened to your job, an emergency fund could help keep you afloat until you were able to find work again – maybe even without having to resort to living on your credit card.

As Sorted notes, having an emergency fund can help people avoid “crisis borrowing” – where they have to rely on high-interest short-term lenders, for example, when they need money quickly. It can also help create invaluable peace-of-mind because you’ll know that you can cope with many money surprises.

How much do you need?

Generally, people are advised to save an amount equal to between three and six months’ worth of income in their emergency fund. Other advice is to save $10,000 or $20,000.

But the right amount for you may well be different…

While three to six months is a guideline, the amount that is right for you will depend on your own circumstances.

To get an idea of what might be appropriate, you’ll probably need to look at your expenses over the last six months or so.

Some of them would be able to be reduced if you needed to, but others will be non-negotiables. Focusing on these should give you a baseline guide to the type of amount of money you might need to be able to cover.

But your wider circumstances have a role to play, too.  If you have a partner who earns enough to keep the household running, you may need less than someone who lives alone or whose family relies solely on them. If you have paid off your mortgage you may not need as much as someone who has a rent bill to cover. 

How to build it – and keep it there

You don’t have to get to your emergency fund target immediately.

If you know roughly how much you’d like to save, you can work backwards to determine how much needs to be put aside each fortnight or month to get you there. It might be easiest to automate this transfer, so you don’t even think about it.

Along the way, you might decide to save any unexpected money that comes your way – maybe from things you’ve sold online or bonuses and perks from work.

You might choose to do your saving in a bank account – maybe one that’s separate from your online banking if you’re worried about the temptation to tap into it – or in an offset account if you have a home loan with a lender that offers that facility.

It’s usually not appropriate to have your emergency fund in riskier assets, like shares, because there’s a chance the value might have dropped just when you need the money.

To ensure your fund stays healthy, try to only tap into it when things really are an emergency. As your circumstances change, you might check in and see whether the fund level is still appropriate. If your responsibilities and commitments grow, the amount you have saved might need to increase.

Want to talk?

If you’re getting your finances in order, get in touch with us. An emergency fund is one aspect of a healthy money life – SHARE advisers help you take a holistic view to work out whether you’re on track for your goals, no matter what stage of life you’re in.  

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.