Emergency Funds - Save Today to Avoid Stress Later

Having an emergency fund protects you from high-interest loans, credit card debt and a lot of stress should a real emergency arise. We outline how to save $10,000 to $20,000, step by step

Updated 18 December 2020

Summary of Emergency Funds:

The best time to start contributing money towards an emergency fund was at least six months ago, the second best time to start saving is today.
A realistic emergency fund will be around $10,000 to $20,000 for most people
Having an emergency fund protects you from high-interest loans, credit card debt and a lot of stress, should a real emergency arise.
Establishing an emergency fund is not as difficult as it might seem if you make regular contributions. You must resist accessing the balance unless you have a real emergency. Paying off a credit card for example is not an emergency.
A Savings Account is likely to be the best place to store an emergency fund. Setting up an automatic payment on payday to grow your emergency fund helps you grow your balance month after month.
There are some great ways to grow an emergency fund with everyday spending - the best example is that offered by the ASB with its Save the Change app. It rounds up your spending and puts the extra money into a dedicated savings account.
You can eliminate bills and spending you don't value by installing a budgeting app - any app linked to your bank account shows you where your money goes, and helps you cut back on what's not important to you.
Starting an emergency fund takes some willpower, but once you get going and continue to contribute, it's likely to be very satisfying.

To help you plan for an emergency fund, our guide covers:

Know This First: What is an Emergency Fund?

An emergency fund (as the name suggests) is for emergencies. Any eventuality that you couldn't afford with the money you have available currently. An emergency fund isn't savings for an overseas holiday or home improvements, etc.
Instead, it is a sum of money for emergencies such as car repairs, medical costs or to pay for essentials should you suddenly lose your job or be unable to work.
Only one in three New Zealanders could last more than a month (financially) if they lost their job. Furthermore, only one in four could last more than three months. This means around 65% of New Zealanders don't have enough savings to get them through three months of no income.
In addition to that, more than one million New Zealanders have no emergency savings at all.

Who Needs an Emergency Fund?

Our view is simple - everyone needs an emergency fund. It doesn’t matter how much money you earn or how much you have saved for retirement; an emergency fund protects you from the cost of unplanned events.

You can’t predict if or when you’ll lose your job, fall ill, need home repairs (which can't be claimed on insurance), find yourself needing a place to live or need major car repairs. Your regular budget covers your daily and monthly expenses, but an emergency fund covers emergencies or unplanned expenses.

Emergency Funds - How Much do you Need?

Our view is simple - an emergency fund should be at least 3 to 6 months of expenses.

Not sure how much that adds up to? The best way to find out is to download your bank accounts and credit card statements for the last year. Excluding transfers between your bank account to credit cards, add up all the expenses - this will cover housing, utilities, food, clothing, entertainment, travel and everything else.

To make sure your expenses are complete:

Look at your total annual expenses (not just one month's expenses as this will be too limited).
Think of the annual expenses or ‘once in a while’ costs you may not think of right away.
Record the total expenses for the year and divide this number by 12.
This amount is your total monthly expenses. Multiply that times three (or six if you want to protect yourself further), and that’s how much you should save.

For example, if you have $4,000 in monthly expenses, you should have $12,000 to $24,000 saved. That might sound unachievable, especially if your savings and investments are below that range, but creating an emergency fund is easier than you might think. We outline how you can do this below.

How to Build Up an Emergency Fund

While it seems near-impossible to sufficiently save when you look at numbers of $10,000 or more, it can be done, and in less time than you think.

Our tips to make it happen are as follows:

Use the 50/30/20 budget. Allocate 50% of your income for fixed expenses (housing, utilities, food, transportation, etc.); 30% for wants or luxuries, and 20% for debt payoff and savings. Focus on that 20%, using it to get out of high-interest credit card debt and saving for an emergency fund. The less debt you have, the more you will save on interest costs - this is money you can direct to your emergency fund.
Consider following the principles of Barefoot Investor. Our guide has all the details that outline how Barefoot fans create a financially secure life.
Bank windfalls (rather than spend them). Tax refunds, work bonuses, inheritance, profits from selling property and/or shares, as well as financial gifts (i.e. money from your parents) are all great ways to grow your emergency fund fast. If you weren’t counting on the money for living expenses, save it instead.
Bank a promotion. If you're getting paid more, don’t automatically upscale your lifestyle and expenses until you have an emergency fund built up. By banking the difference, you're financially protected and are still able to enjoy the same level of lifestyle you did before.
Open a savings account you can’t touch. Don’t make your money accessible. Open a savings account at a bank that isn’t tied to your main account. Decline the attached debit card and leave the funds untouched - our guide to savings accounts lists the best options currently available
Cut your expenses. Even small changes add up. We outline some ideas below to help you reduce your expenses:

Negotiate insurance bills, shop for cheaper policies (you can compare almost every insurance type using MoneyHub)
Switch to a cheaper car
Consider substituting grocery brands for the store brands
Transfer your debt using balance transfer credit cards (these offer 0% interest rate (instead of paying 20% p.a. or more during months you can't pay the balance in full).

Where to invest an emergency fund?

We believe this best place to keep an emergency fund is in a Savings Account, and one which limits your amount of access while paying an above-market interest rate is best. Some people start a savings account with a new bank so they can't see the funds when accessing internet banking from their day-to-day transactional account. The less you have access, the more chance of the money remaining untouched.

Further to this, we suggest considering a Savings Account over a Term Deposit because you'll have instant access to it, should you need to draw on the funds.

10 Must-Know Facts About Emergency Funds

Emergency funds are achievable when you aim big and start small - even saving $10 to $20 every week makes a big difference when an emergency arises. Our ten must-know tips and facts below help you maximise your savings, week after week.

Start with a goal of getting to $1,000 (rather than $10,000+)

Don’t overwhelm yourself with large numbers. Aim for $1,000 first.
Aim to save $1,000 in as little time as possible. Set a goal for yourself and budget the amount necessary.
$1,000 is enough to cover a basic emergency like car repairs, unplanned health costs or a home repair.

What you can do right now :

Cut your expenses. Even if you save $50 a month cutting expenses, that’s $600 in 12 months.
Cut out unnecessary habits. Cancel unnecessary subscriptions and save the amount instead. Our guide to saving money has more details.
Set (and stick to) a budget.

Only use the funds for true emergencies

It's essential to define emergencies early on, so you don’t spend the money needlessly on things you don't need
Holidays, cosmetic home changes, and a new car are NOT emergency expenses
Job loss, medical emergencies, car troubles, and necessary home repairs are emergencies

What can you do right now

Open a separate savings account not at your local bank (our guide has more)
Write down the reasons you can use the funds and post it somewhere visible
Figure out how much you’d need to cover your true emergencies

A credit card can be an emergency fund destroyer

For many people, credit cards only put them further into debt as repayment in full becomes unrealistic due to an ever-increasing balance.
Using borrowed funds adds to your monthly liabilities - it doesn’t help you get ahead
Credit cards create vicious debt cycles that are hard to break free from. If you have an emergency, credit card debt can limit the amount of money you can access.

What you can do right now:

Drop the limits on credit cards - going from $2,000 to $1,000 or even $500 means $1,000+ less debt. With a lower limit, you'll spend less.
Only use credit cards for expenses you can pay off in full. It sounds idealistic, but it can be done.
If you still lack the willpower to limit your use, cancel the credit card altogether. Many people who do this don't miss it.

Allocate money for savings and debt repayment

Earmark 20% of your income for debt payoff and savings (including your emergency fund)
Work towards paying off your debt by consistently contributing more than the minimum payment
Keep a portion of the 20% of your income for your emergency fund

What you can do right now

Redo your budget and set aside 20% of your income for debt payoff and savings
Organize your debts in order of smallest to largest balance, and pay off the smallest balance first
Save as much of the 20% in your savings account as possible

Consider getting an app that helps you save your spare change

Savings doesn’t mean only large amounts every week or month; every cent counts and rounding up purchases is a great way to save on every transaction.

What you can do right now

Open a bank account that rounds up your purchases and sweeps the ‘spare change’ into your savings account. Each transaction can 'save' you as it rounds up to the nearest $1, $2, $5 or $10 etc. For example, if you make a purchase for $16.99 and you set it to round up to the nearest $10, $3.01 will be saved.
The best example is that offered by the ASB with its Save the Change app. It's free and helps you save without you having to do anything.

Don’t stop saving just because you have an emergency fund

Keep up your saving habits, but consider other options like investing or saving for another goal, like a house deposit
Find ways to make your money grow fast, such as in ETFs, growth shares, dividend-paying shares and managed funds
Start a sinking fund to cover occasional expenses, like holiday gifts, annual taxes, and annual car maintenance. This way, regular large expenses become less of a hassle and cash hit.

What you can do right now

Find other bank accounts or investment vehicles to grow your savings; they don’t have to be as liquid as an emergency fund. Our investing guide is a good start.
Set financial goals and budget how to reach them, whether you want to buy a home, take a vacation, or save more for retirement.

Borrowing for an emergency is never good

Don’t assume you can or should borrow money in an emergency; it creates a feeling of unrest and financial stress. Furthermore, the interest charges could put you in even more financial trouble

What you can do now

Create good saving habits, even if it’s only a few dollars a week
Get in the habit of saving and not spending and/or borrowing. It takes willpower, but it's easy and satisfying once you get going.
Lock up your credit cards and only spend what you can afford

Don’t expect to build your emergency fund overnight

It takes time to save for your emergency fund, don’t rush it. If you keep consistent habits, it will grow. Don’t give up on your goal by stopping your contributions - the short-term pain is almost always worth the long-term benefit of a healthy emergency fund.

What you can do right now

Stay consistent in your saving efforts
Check your progress periodically to make sure you’re on track
Find an account that pays higher interest rate

An emergency fund provides peace of mind, meaning less stress and struggle

If money keeps you up at night, an emergency fund will help. Knowing you have money if you lost your job or fell ill is the key.

What you can do right now

Find a way to include emergency savings in your budget
Stick to your budget, revisiting it often to make sure it’s working. Our budget guide has helpful tips to make things easier.
Save your money in an account you can’t easily access - our best savings accounts comparison highlights the best on offer.

Automatic savings takes the pressure off you

Most people naturally pay themselves last; automatic payment savings stops that from happening and gets you money upfront to have the ability to save. Automatic savings send money from your bank account right to your savings account

What you can do right now:

Figure out how much you can send to savings automatically without worry. Start small, and grow it as you get comfortable with the commitment. It's highly likely you won't notice the difference.
Set up an automatic transfer with your bank to hit your emergency fund savings account on payday so there will always be money available.

Emergency Funds - Frequently Asked Questions

Emergency funds are simple, effective and undeniably helpful when you need to fall back on them. Our list of common questions below helps to make sure you are best prepared to save what you need to.

Does everyone need an emergency fund?

Yes - whether you are working, retired, or a stay-at-home parent, an emergency fund is essential. COVID-19 is just one example of sudden shocks to an economy which can drastically change the status quo. Life happens to everyone - having money on hand to pay for emergencies is the only way to ensure you don’t suffer financially.

What is a reasonable emergency fund?

Everyone is different, but our view is that 3 to 6 months of expenses is reasonable. Think about your past. Have you lost a job and been out for more than a few months? Do you worry about falling ill and not being able to work? If so, a larger (six months’ worth) emergency fund is best.

Should you invest your emergency fund?

We don't think an emergency fund should be put into a managed fund or individual shares given the risk of the investment falling in value. Instead, your emergency fund should be liquid and immediately accessible. While the lost returns may be 10% per year (based on high-market returns vs savings accounts returns), having money means you'll have no debt costs

Should you keep saving once you hit 3 to 6 months of expenses?

We believe you should always save, but once you have your base emergency fund set up, consider investing your funds and/or putting your money in something with a little risk to reap greater rewards. Our guide to investing has more details and outlines common ways to invest in New Zealand.

Related guides