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.
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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. 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.