The ultimate insiders guide to your emergency stash
Why an emergency stash is your top money priority
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
Your 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 it's 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.
What constitutes a money emergency?
Save your Emergency Stash for a genuine emergency; something you couldn’t have predicted would happen at that time. Overspending your budget is not an emergency.
Genuine money emergencies
- Unexpected medical bills for you or your family (not your annual dental checkup)
- Death or illness of your parents or other family members requiring a trip at short notice or financial support for those affected
- A major breakdown or accident with your car, important appliances (like the stove or hot water or heating system) or your home (not that the regular service cost a bit more than usual)
- Fines or legal expenses (not the cost of the conveyancer on your house purchase or if you habitually get parking tickets)
- Loss of income through unemployment or being injured so you can’t work
- Relationship or marital breakdown
You may have insurance for some of these, but it can take a while to get paid.
Income Protection Insurance will replace your income if you can’t work due to accident or illness.
Other Insurance that might help with Emergencies includes your Health Fund, Car insurance and Home and Contents.
Government support may be available if you are a victim of crime or major natural disaster.
If you draw on your Emergency Stash and later get an insurance payout, make sure you replenish your stash first from the proceeds.
Not money emergencies
- Nothing to wear
- A sale bargain
- Appliance breakdown (like a TV)
- Expenses that are bigger than you planned (like your power bill)
How to be prepared for any money emergency
1. Define your Stash
Get on the same page as your partner about what constitutes an Emergency and therefore your Stash can be used to pay for it.
2. Replenish your Stash
When you withdraw from the Stash, have a plan to replenish it. Apply any insurance proceeds to the Stash. You may need to defer other goals to get your Stash back on track.
3. Review your Stash
Review your Stash and make sure it’s still right for your circumstances. You might even find that you need less in there now than when you first set it up.
YOUR EMERGENCY STASH - HOW MUCH IS ENOUGH?
An Emergency Stash is a pool of cash to help you deal with unexpected events as they crop up. Believe it or not, this is the most important thing you can do to strengthen your finances. But how much is enough?
As with a lot of things in personal finance, there is no one size fits all answer. It’s a balance between having enough when you need it, and at the same time not tying up too much cash that you could use to meet other goals like paying off debt, buying your home or investing.3 months’ expenses is a useful benchmark for the minimum you should have.
This benchmark is a great start and is probably enough for most people. But the right amount will depend on your particular circumstances.
You might need more if any of the following apply to you:
You are self-employed or have a casual job
You have children or other dependents
You have a lot of debt
Your partner doesn’t earn an income
You have a specialized job, are very senior or are at the top of your pay grade
You and your partner both work in the same company or industry
You don’t have income protection insurance
You don’t have health insurance
You own an older house
You have an old car you depend on to get to work
Your parents live overseas or are in poor health
- Your monthly 'CHORE' expenses exceed 50% of your take home pay
If five or more points on this list apply to you, then 6-9 months would be prudent.
The right insurance plan including Income Protection might help reduce how much you need.
Start by saving $1 000, then when you have erased your debts (other than your mortgage, HECS and car loan), allocate most of your savings to building up to 3 months. The balance of the fund can be built up gradually by allocating part of your savings to other goals and part to your Emergency Stash until you reach the amount you decide is right for you.
Review your decision annually
As your circumstances change you may find you can reduce your Stash. For example if you get insurance in place, or your dependent parents pass away or your kids leave home or you upgrade your car.
When you have your fund fully allocated, make sure you look after it well so it’s there when you need it.
Where should I keep my emergency stash?
If having a stash of cash to deal with emergencies is critical to having secure finances, then keeping it safe in the right place is just as important.
Here are Sherpa's Top Four Things to consider to help you decide where to keep it:
- It needs to be accessible, but not so accessible you are tempted to spend it on other things.
- You don’t want to be hit with nasty fees or taxes when you withdraw it
- You don’t want to be dependent on what’s happening in the economy or share market to determine how much is in your stash.
- You need certainty that you can access it when you need it
The bulk of your fund should be kept in an online high interest savings account that is NOT linked to your ATM or credit card.
This account should be with a bank so that you get the benefit of the Government Guarantee on your savings. Ideally this should not be the bank where you have your home loan.
Any account you choose should be low or no fee, pay a higher rate of interest and have no notice period or penalties for early withdrawal.
It should not be invested in anything other than cash that might create uncertainty as to how much you will have when you need it.
You should not rely on a line of credit or redraw facility on your home loan.
You may not be able to access it when you really need it – like you’ve lost your job. The Bank always has discretion as to whether it will approve the drawing. Sure, mostly you will simply log on to internet banking and the cash will just appear. BUT sometimes it won’t. I have lost track of the number of people I know who lost their jobs in financial services in 2008 during the GFC and suddenly found the Bank cancelled their lines of credit or refused a redraw request.
An offset account is better, but it is still subject to what’s known as the Banker’s right of set off.
In plain English this means that if you don’t pay the Bank what you owe they can take your deposit and apply it against what you owe them. This is also a good reason to keep your deposit elsewhere.
You might not need it all at once
If you have a larger (more than 3 months’) Emergency Stash, you can accept some delays or restrictions in accessing some of the funds.
You need some you can access instantly, but you could tolerate a delay on accessing a larger amount.
Splitting some out into (say) a 1 or 3 month term deposit might get you a higher rate of return. Keeping some (but not all) in an offset account will reduce the opportunity cost of keeping your Stash.
Keep some of your stash in a joint account which needs both signatures and some in your own names.
Some Emergencies might mean you won’t want to or be able to rely on your partner being there to withdraw the money.
A three way split usually works well. That is, keep a third in a joint account, a third in your name and a third in your partner’s name.
If your partner is injured and unable to withdraw funds, you will have some you can access immediately while you sort out with the bank or solicitor use of your power of attorney.
Alternatively, you may need to be able to escape an abusive relationship or your partner might drain your joint accounts and skip town. Believe me, it happens more often than you think! And nobody ever believes it will happen to them.
Building your Emergency stash should be your top money goal because it provides a stable foundation for your finances, and that comes with peace of mind. Having an emergency stash means having money when you need it, quickly.
Seven steps to build your emergency stash fast
Here’s how to build your emergency stash in 7 steps (or quickly):
1. Set up a direct transfer
Make the setup like a monthly bill you have to pay. Arrange to have a set amount transferred from your day to day account to a special savings account each pay day day. You can even get your employer to make a separate payment direct from your pay. In most cases all you need to do is ask.
2. Use lump sums
If you get a bonus at work, win some money or get a tax refund, transfer 90% of it to your savings account - straight away. The remaining 10% is your reward to spend how you like.
3. Stop spending Gold Coins
When you get home each day, round up any gold coins you have on you and drop them into a savings jar. You might be surprised at how quickly your coins add up to big bucks. At the end of each month, deposit them in your savings account. If you’re feeling adventurous, save ALL your coins. For advanced players, save your fivers too.
4. Sell Stuff
That stuff you no longer use.. try to sell it on eBay or Gumtree. Have some fun with friends and throw a joint garage sale. If you’re not using that stuff, the dollars are better in your pocket.
5. Earn extra Income
Check out some crowdsourcing platforms (like Airtasker or Freelancer) for odd jobs that you could do for extra cash.
6. Use CashBack Rewards
Does your credit card have a rewards program that gives you CashBack? Apply these payments to build your Emergency Stash. What about loyalty cards that give you every 10th coffee free?
Put aside the money you save each time you redeem your loyalty bonus coffee.
7. Go nuts cutting unnecessary costs
It’s amazing what you can cut out if it’s only for a short period while you get your Emergency Stash to the first $1 000.
It’s a bit like a crash diet; short periods only. A budget built on restriction isn’t sustainable as it will most likely lead to blow outs and failure. But as a quick sprint to your first $1 000 - it’s worth a go.
When you get your Emergency Stash hits $1 000, shift your focus to getting rid of your debts. When you’re done there, circle back to your Emergency Stash and get it up to the level that’s right for you.
Look after your stash – you never know when you'll need it.
VinceScully
Life Sherpa®
With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.
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