The word stash implies something naughty and hidden away from prying eyes, but there’s everything right about stockpiling surplus cash for genuine money emergencies.
Like any good stash, it should be secure – in a savings account, not a jam jar – and shouldn’t be too easy to raid or liberate without a second thought.
Let’s take five steps to build your emergency money stash and keep it safe for that ‘rainy day’.
1. What’s a genuine money emergency?
You won’t get far hitting your savings for expenses that should have been budgeted for or are not dire necessities.
So, no clothing or TVs in the sales, other bargains you fancy or larger than anticipated power bills. Pay for these from other piggy banks.
Save the stash for the bummers in life; unforeseen medical bills (not annual dental check-ups); death or illness in the wider family; sickness or injury preventing work; fines and penalties; and relationship breakdown. You can get insurance for some of these but not all, and it can take time to get paid. So first off, define what the stash is for in writing and stick to it.
2. Make building and replenishing your stash a high priority
Building your emergency stash should be your top money goal because it provides a stable foundation for your finances, and that comes with peace of mind.
Having an emergency stash means having money when you need it, quickly. When you withdraw from the cache, have a plan to replenish it. Apply any insurance proceeds to it. You may need to defer other goals to get your stash back on track.
One good idea is to set up a regular direct transfer. Make the setup like a monthly bill you have to pay. Arrange to have a set amount transferred from your day-to-day account to a special savings account each payday. You can even get your employer to make a separate payment direct from your pay.
It’s amazing what you can cut out if it’s only for a short period while you get your emergency money stash to the first $1,000. It’s a bit like a crash diet, short periods only. A budget built on restriction isn’t sustainable as it will most likely lead to blowouts and failure. But as a quick sprint to your first $1,000 – it’s worth a go.
3. Don’t be among the almost 20% of Aussies who couldn’t access $2000 in an emergency
Finances are fragile if you are forced to borrow money when an unexpected event happens. An emergency is not always dramatic or extraordinary.
Events happen every day that are unplanned and require cash. Parents could be overseas and get sick. The engine in your car could seize and need urgent and expensive repairs. Worse, you could lose your job or get injured, so you can’t work. You may have insurance for some of these – but sometimes you just need money now. It’s not something you can put off until later.
In contrast, debt repayment, buying a home or retirement goals are longer-term goals, and the saving and investment strategies assume you won’t access the money any time soon, which gives it ample time to grow. Think of your emergency fund as protection for your other goals.
More on this: Could you raise $2000 in an emergency?
4. Review your stash
Check your stash from time to time to make sure it’s still suitable for your circumstances. You might even find that you need less in there now than when you first set it.
If you need to borrow to meet an emergency, you undo all the excellent work you have done to pay down your debt. Psychologically this can be difficult and can undermine your plans to eliminate your debt.
If your debts are high or your credit history is poor, you may not be able to borrow money in an emergency. Ideally, you want that cash without additional costs (interest, penalties) or losses (cashing out investments that have lost value
5. How to make savings when you also have debts
Only one other goal comes close to building an emergency money stash, and that’s paying down high-interest debt. So try to balance those two goals.
Building an emergency stash before you pay down your debt may seem counter-intuitive. The interest you pay on your debt is likely to be much greater than any interest you’d earn by keeping an emergency fund in a bank account. But it’s essential, and it works.
Emergencies are a fact of life. It’s best to be prepared for financial emergencies physically, mentally and emotionally. An emergency stash gives you preparedness and peace of mind.
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.