What is an emergency fund?

Emergencies can happen at any time, often when they are least expected. It could be a sudden medical expense, a car repair, a job loss, or even a natural disaster. These events can cause financial strain and make it difficult to make ends meet. That’s where an emergency fund comes in.

This article includes tips, suggestions and general information. We recommend that you always do your own research and consider getting independent tax, financial and legal advice before making any important decision.

Emergency funds, also known as emergency savings, refer to money set aside in an account for unforeseen circumstances. Think of it as a financial safety net. Keep reading to learn about what emergency funds are and how they work.

The difference between savings accounts and emergency funds

Savings accounts are a type of bank account that typically allow individuals to save money and earn interest on their deposits. While an emergency fund is typically held in a savings account, not all savings accounts are considered emergency funds.

The key difference between a savings account and an emergency fund is the purpose of the money. A savings account is normally used for a financial goal, such as a down payment for a house or a holiday while an emergency fund is specifically set aside for unexpected expenses.

How to pay into an emergency fund

A common approach is to dedicate a portion of income toward emergency savings. Keep in mind that an emergency savings account functions like any other savings account in terms of how it’s funded.

Money can be added to an emergency fund by:

• Automating savings by setting up a direct deposit from paycheques into an emergency fund account, which helps make contributions consistent.
• Transferring money manually through online banking or by visiting a bank branch.
• Depositing a cheque or cash.

How funds are added to an emergency fund will vary depending on the account. Some accounts may come with associated fees, so it’s important to always read and understand the full terms and conditions.

Some tips on how to save for an emergency fund

Consider these tips for help getting started:

• Set a specific goal. Determine how much needs to be saved for emergencies. A common guideline is to save three to six months' worth of living expenses. Keep in mind that each person’s needs depend on their personal circumstances.
• Create a budget for the emergency fund. Set a monthly budget for emergency fund contributions, and stick to it as best as possible. Budgeting apps or spreadsheets can also help keep track of expenses and savings.
• Keep the emergency fund separate. Consider opening a separate savings account or utilise an app for the emergency fund. This can help you avoid dipping into the money for non-emergency expenses.
• Start small. It is possible to start with small contributions and gradually increase them over time.
• Review the emergency fund regularly. Check the emergency fund balance regularly and adjust the savings plan as needed.
• Be patient. Building an emergency fund takes time and discipline. There may also be times when contributions are adjusted when circumstances change.