There are many names for it – rainy day money, a nest egg, a MOJO account – but the concept is the same.
It is a wise financial decision to have an amount of money set aside in a bank account that can be accessed in case of an emergency which requires money.
These are the reasons that it is a great idea:
- Stuff happens to everyone. Having emergency funds means that you can pay an unexpected large bill. Not every business offers credit terms or would allow you to pay a bill off over time. A large bill could put your credit card over the limit. Examples could be anything from an emergency dental bill, a vet bill, having to replace essential items like a fridge, urgent house repairs like a new hot water cylinder or car repairs.
2. It is hard to borrow money on short notice. You may not have the time to apply for a loan to cover the cost of the emergency, and if you have to go to one of the short term lenders, the fees and interest rates are horrendous. The situation then goes from an emergency to a financial crisis! If the emergency relates to a drop in your income (if you are sick and unable to work or have lost your job), this also will make it much more difficult to meet the criteria for debt servicing and you may struggle to borrow money.
3. It is a cheap way to access money. What I mean by this is that you can “borrow” from the emergency fund as long as you then make arrangements to pay it back – as you would do if you borrowed the money from a bank or a finance company. My husband used to “borrow” from our emergency fund to buy new cars. The last time that he did that, I charged him interest! He went to work and told his mates that I was charging him interest – he thought that it was FUNNY! I often wonder what his workmates thought?? It did, however, stop him borrowing money from the emergency fund to buy cars that we had not planned for and didn’t have enough money to buy at the time! Mission accomplished!
4. It gives you more choices. Having a stash of money in a bank account allows you to have more options if you suddenly find yourself in a place that you were not expecting. A recent example of this was when we all had to go into Covid lockdown in March 2020 and many businesses suddenly found themselves in a place of having NO INCOME. There was a wage subsidy of $585 a week available for full time employees, which was great if you were earning less than $30,420, but if you were earning more than that, you suddenly had a huge drop in pay for the period of lockdown! This is where people were tapping into emergency funds to meet mortgage payments and feed their families. People who didn’t have funds to fall back onto had to load up their credit cards and no doubt would have struggled to repay that money when they did get back into their full time work.
Having an emergency fund also allows you to push out the stand-down periods on your income protection and mortgage instalment protection insurance covers and to take higher excesses on your medical, house, contents and car insurance. This can save you thousands of dollars over the course of your insurance policies.
5. It reduces your stress levels. Knowing that you have money in the bank to protect you will help you to be less stressed about life. It is a guarantee that, if the world throws something at you, you will have a better chance of getting through it in a better financial position.
Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
DISCLAIMER: The information contained in this article represents the views of the author. It is based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are given with an express disclaimer of responsibility and no right shall rise against any of the authors or Smart Money Advice or their employees either directly or indirectly out of any views, advice or information.