How to Prepare Yourself for a Financial Emergency

December 9th, 2022

Almost one in three Australian families are financially stressed, according to a 2021 survey of more than 5000 Australian households. Chronic financial stress of this nature can place a heavy emotional toll on individuals, and can be debilitating.

Financial emergencies can take many forms; a broken down vehicle, unforeseen medical expenses or even vet bills. They can present seemingly impossible barriers to financial security. If you’re unprepared, emergencies like this can often lead to debt or the inability to pay for essential expenses, exacerbating financial stress further.

It’s not all doom and gloom. Thankfully, planning and budgeting for financial emergencies can be a rewarding and simple exercise.

In this article, we’ll discuss how to prepare for financial emergencies. We want to make your life easier in the long run while giving you peace of mind knowing that no matter what happens, you’re covered!

What is a financial ‘emergency’?

Depending on the degree of financial stress you’re under, financial emergencies can take on a lot of forms.

For those of us with significant expenses, such as rent or mortgage payments, it’s crucial to start planning now. A short period of unemployment or a large unexpected expense can quite easily slip into the category of ‘financial emergency’.

A financial emergency is any event that will leave your bank account in the red for an extended period of time.

Examples might include:

  • Job loss
  • Chronic medical expenses of yourself or a dependant
  • Unexpected long-term costs, such as increased mortgage repayments
  • Other types of emergencies, such as damage to your home or livelihood

Regardless of the emergency, if you prepare for financial stability by creating an emergency fund, you’ll have the extra money you need to cover your living expenses, avoid debt and other financial difficulties.

Creating an emergency fund

It’s not uncommon for emergencies to happen, so in times of crisis, your income alone may not cover costs. This is when your emergency fund comes into play.

When it comes to financial emergencies, building an emergency fund is the key to financial stability. It will allow you to save money and create a financial plan for the times when you need the extra cash most.

Make a budget

If you don’t have a monthly budget already, now is a great time to start and the perfect opportunity to create an emergency fund at the same time.

A budget won’t always cover all of your financial obligations but it will give you a bit of relief when checking your account during financial emergencies.

Besides your emergency fund, you should also be sure to factor in things like credit card debt, health insurance, life insurance, home insurance and some extra savings for living expenses. You’ll feel great when you’re super prepared, ready for the unexpected.

Set a savings goal 

A good rule of thumb is that your emergency fund should amount to approximately three months of pay.

While this might seem like a lot of money to just have sitting around, you’ll be thankful in the long run.

According to the Australian Parliamentary Library, the average duration of unemployment for Australian jobseekers classed as ‘Long Term Unemployed’ is almost two years. It is estimated that as of August 2022, there were over 400,000 of these job seekers in Australia – that’s more than the population of Townsville.

So how much should you save?

There is no set amount that you should save but it’s important to assess your financial situation and ensure you have a safety net for when the going gets tough.

Try saving enough money to cover living expenses for a few weeks – or at least long enough to take advantage of social safety nets. Another thing to consider is unemployment insurance. The larger your emergency fund is, the more secure you’ll be.

The trick to building an emergency fund of this size is taking a slow and steady approach.

Simply allocating a small amount of each week’s paycheck is a simple way to do it. For example, $25 per week is $2,600 over two years. Double your weekly addition for a total of $5200 – and so forth. Over time, your emergency fund will grow, and with it, your degree of financial security.

Keep your savings in a different location

Keeping your money divided up into purpose-made bank accounts is the easiest way to ensure that you don’t accidentally go digging into your savings.

While the simplicity of having just one ‘big pile of cash’ savings account might seem appealing, it is most likely at odds with the nature of your savings goals.

Some savings goals might be  short term – such as for a new television or surfboard – while others can be long term, like for a new car, or a deposit on a house.

Plus, your emergency fund isn’t a savings goal per se.

It’s more like insurance, protecting you in the event of an unexpected financial emergency.

With this in mind, it makes sense to have a totally separate, high-interest savings account, specifically for your emergency fund.

How else can we plan for financial emergencies?

Once you have your emergency fund set aside, it’s important to keep it topped up. Increasing it to six months worth of living expenses, or even more, is a great goal.

If you feel like you need even more security, or you are anticipating a need to start tapping into your emergency fund, you might want to consider other strategies. This might include shopping around for home insurance.

Ultimately though, cash is king. When push comes to shove, financial emergencies are often best resolved with easily accessible, liquid cash. Taking the time to prepare a budget that will allow you to have a back-up fund will save you stress, hardship and difficulty in the long-run.

What happens if the fund doesn’t cover the financial emergency?

What people don’t always account for is that their emergency fund may not cover all expenses, which can lead to debt and financial hardship.

The good news is there are ways to prevent this from happening.

A Small Loan from Nimble can give you the extra cash you need during financial emergencies, with flexibility to schedule your payments to suit the frequency of your salary repayments , keeping you prepared.

Earning additional money

Have you thought about a side hustle to help build your savings?

There are many ways to make a bit more cash these days from food delivery, babysitting and online stores, through to setting up a stand at the local market.

Every cent helps and can contribute payments to that emergency fund you are growing.

Keep on top of your maintenance

Whilst there is no way to prepare for the unexpected, a few little maintenance tips can help give you a better chance at keeping your savings balance on the higher side.

  1. Avoid car emergencies – make sure you schedule that service on time, replace wheels before they wear out and drive responsibly to avoid a fine
  2. Keep your home in tip-top shape – organise a pest inspection before you have a termite problem, fix a leaking roof to prevent major damage and turn off lights so you don’t have an unexpected electricity bill
  3. Create healthy habits – go to the dentist for a filling to prevent a root canal, eat well and exercise  to stay healthy , and invest in life insurance.

The key takeaways

When it comes to financial emergencies and creating an emergency fund, failing to prepare is preparing to fail.

So remember:

  • Build savings now to be prepared for the future
  • Create a monthly budget to factor in three to six months worth of expenses
  • Keep your emergency fund in a different account to your normal bank account as it will make it harder to use your cash on living expenses.
  • Keep on top of routine maintenance to prevent bigger bills

And if you need the funds sooner rather than later, a Nimble AnyTime Virtual Mastercard can send you the cash boost you need right now.

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