How to set up a savings account for emergencies

The recent pandemic has given many Australians a financial wake-up call, with a new report indicating that more of us are now planning to put more of our savings aside in case of future emergencies.

According to the NAB report, even though some social distancing restrictions are starting to be eased, not all Australians want things to go back to the way they were before. Among the planned lifestyle changes highlighted by the report, Australians indicated that in the future they want to make more purchases online, keep working from home, and put more savings aside for emergencies.

A financial emergency doesn’t have to be a global pandemic, or a recession. It could be:

• Yourself or a loved one (including pets) getting sick or having an accident, leaving you with more than the usual medical bills to pay.
• Your car or home being damaged, and your insurance being unable to cover the full cost.
• Someone you care about who lives far away experiencing a crisis and having to book last-minute travel to go see them.

How much money should be in your emergency fund?

According to the Australian Bureau of Statistics (ABS), over the period of mid-March to mid-April 2020, 81 per cent of Australians reported that their household could raise $2000 for something important within a week, which was lower than the 84% of people recorded in 2014.

Approximately one in eight Australians (12 per cent) reported that their household could raise $500 but not $2000 for something important within a week, and one in twenty (5 per cent) reported that their household could not raise $500.

When you first start saving up your emergency fund, this $2000 benchmark used by the ABS could be a good target to initially aim for. However, the exact amount you may want will depend on the size of your household, your income, expenses and more.

If you haven’t yet put together a household budget, it could be a good idea to get one started. Once you know your essential monthly household expenses, it could be worth aiming to have enough money saved in your emergency fund to cover these costs for one or more months, with MoneySmart recommending three months as a good target.  

The more money you can afford to save (possibly by cutting out one or more of the non-essential expenses from your budget), the more secure your financial position may be in case of future disasters.

How can I save more money? 

There are many different ways to cut costs in your budget and put the spare change towards your emergency fund, including: 

• Switching and saving: Swapping credit cards, refinancing your home loan, or swapping electricity, gas or internet providers could get you a cheaper deal, slashing your bills. Even swapping out your old power-guzzling appliances for energy-efficient options could help you to save money in the long run.
• Setting up an automatic transfer: Do you regularly get paid on the same date? Consider setting up a direct debit to automatically transfer some money from your regular bank account to your savings account each payday, so you won’t be tempted to spend it on everyday purchases.
• Halting your non-essential spending: Look at your budget, and work out if there’s anything you regularly spend money on that you don’t regularly use (for example, that gym membership you never got around to cancelling). Consider putting a stop to these and instead put the money into your emergency fund.
• Selling your spare stuff: Is your home filled with stuff that you’re not really using, but haven’t gotten rid of yet? Consider jumping onto Gumtree or Facebook marketplace and selling a few pieces, so you can put the sales into your emergency savings.
• Getting a side hustle going: Getting a second job is a big commitment, but there are lots of ways to use your time to make a little money on the side, from moonlighting as an Uber driver to letting out your spare room on Airbnb.

Can’t I just put my emergency expenses on the credit card, or take out a personal loan?

If you already have a credit card available, in theory you could use this to cover the costs of your emergency expenses. In fact, some people keep their credit card in reserve for emergency use only.

However, if you don’t pay off your credit card balance in full within its interest-free period (often 44 to 65 days, depending on the card), you’ll be charged interest on what’s still owing. This means you risk seeing your debt start to increase faster than you can afford to pay it back, and putting you into an even tighter financial situation.

If you don’t already have a credit card, applying to get one in order to pay for an emergency expense could be challenging. If your finances are already stretched, a bank or lender may not want to risk lending you more money that you may struggle to pay back. The same goes for applying for a personal loan to cover your costs. It may be possible to use a payday loan to cover smaller expenses, but these short-term loans can put you at high risk of being slammed with expensive overdue fees if you don’t pay them back on time.

Which savings account should I use? 

If your goal is to build up your emergency fund quickly, you may want to consider a savings account with a high bonus rate and low or no fees. If the higher interest rate is an introductory bonus and only lasts for a limited time, you can focus on building up your emergency fund during this early period. And if the higher rate requires you to fulfil certain terms and conditions, such as making regular deposits and no withdrawals, you can try to stay on top of these conditions until you’ve saved up what you need.

In theory, you could use a term deposit to grow your emergency fund. On one hand, the fact that term deposits don’t let you easily access your money means that you won’t be tempted to dip into your emergency savings for everyday shopping or expenses. On the other hand, because your money will be locked into your term deposit, withdrawing it during an emergency could require extra time and effort.  

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