Costly surprises have a way of sneaking up on us, so building your emergency stash should be your Number 1 money goal. A healthy stash gives you a solid foundation for your finances and let’s not forget, peace of mind. This way when an ‘emergency’ expense pops up, you can access money.
Almost a quarter of Australians don’t have access to $3 000 if they needed it for an emergency
Finances are fragile if you are forced to borrow money when an unexpected event happens. An emergency is not always dramatic or extraordinary. Events happen every day that are unplanned and require cash. Parents could be overseas and get sick. The engine in your car could seize and need urgent (expensive) repair. Worse, you could lose your job or get injured so you can’t work. You may have insurance for some of these – but sometimes you just need money now. It's not something you can put off until later.
In contrast, debt repayment, buying a home or retirement goals are longer-term goals, and the saving and investment strategies we suggest for them assume you won't access the money any time soon, which gives it ample time to grow. Think of your Emergency Fund as protection for your other goals.
Make Building Your Emergency Stash a High Priority
Only one other goal comes close to building an Emergency Stash, and that's paying down high-interest debt. So try to balance those two goals. Building an Emergency Stash before you pay down your debt may seem counter-intuitive, given that the interest you pay on your debt is likely to be much greater than any interest you'd earn by keeping an Emergency Fund in a high interest bank account. But its important and it works.
Why is an emergency stash so important?
If you need to borrow to meet an emergency, you undo all the good work you have done to pay down your debt. Psychologically this can be difficult and can undermine your plans to eliminate your debt. If your debts are high or your credit history is poor, you may not be able to borrow money in an emergency. Ideally, you want that cash without additional costs (interest, penalties) or losses (cashing out investments that have lost value).
Emergencies are a fact of life. It’s best to be prepared for financial emergencies physically, mentally and emotionally. An emergency stash gives you preparedness and peace of mind. Find out how to build your Emergency Stash in 7 Steps.
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With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Before creating Life Sherpa®, Vince founded the Calliva Group; a fund manager, product issuer, adviser and lender. Vince is an adviser to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie Bank’s infrastructure team.