Your savings account might be your saving grace

Lately I've been thinking about what it means to create emergency savings, especially as it keeps bubbling up in my Google searches. The idea of a 'rainy day fund' sits well with me at face value, but it also implies that a person has the flexibility to stash away cash. This is slightly problematic because clearly not everyone is enjoying such financial freedom right now. 

We know that in this current pandemic-focused world, some people are literally going from pay cheque to pay cheque. So, there actually isn't a rubber-band bound wad of notes under the mattress for these folks. Indeed for some, financial support is a far more realistic solution. This is worth calling out before we press on. We have written up some guides on such support for both individuals and businesses, so they're worth a read if you're interested.

If you are fortunate enough to still have regular pay coming in, many online writers, including our own, point toward the value of emergency savings. So, what is that in reality?

A recent New York Times article informed me that you can’t just save willy-nilly for an emergency fund, but rather must have a disciplined approach. Specifically, the author suggested saving a regular percentage of your pay or any windfall, like a tax refund. Then, put that little bit of money into a savings account to be used later on.

This is what the motivated among us call a "savings goal". The point is that without a fixed visualised goal you'll never achieve the bare minimum saving needed for your emergency. Instead you'll procrastinate or forget. I've read elsewhere that we sometimes propose a savings target that's far too lofty. This can be intimidating, the same way it is to overcome a 3-0 football deficit at the half. Any good coach will tell you if you break the task down into smaller bits, the target will seem easier to hit. You’ll be more upbeat about actually achieving it. 

How about some practical tips then?

The government's Moneysmart people tell us to set up a separate account. This might be sensible because it'll help ease the temptation to dip into the funds of your regular everyday account. While you're at it, you might also find an account that offers a decent rate of interest. For example, MyState and Australian Unity are offering 1.75% as an ongoing bonus rate, according to our experts, though this is subject to some conditions. There are some decent introductory rates to think about too, as long as you realise the higher rate will eventually drop. Further still, there's a compelling rate for savers in the 18 to 29 age group of 3% on Westpac's Life account, our experts tell us. Again, check the conditions.

Another approach could be to use an offset account, should you have a home loan. Putting money in an offset account has the dual benefit of lowering your home loan interest payments, but also means you can access your money quickly without penalty. A term deposit on the other hand, while offering a fixed rate of interest, will penalise you for withdrawing money early. This pretty much rules it out as a good place to put emergency money. Term deposits also demand some solid research: though the longer terms usually reward your patience and that's well illustrated by Judo Bank's 5-year term deposit which offers 1.65% interest.

The other tip I've read about emergency funds is that they should be topped up whenever depleted. Now I've read this and thought perhaps like you that this is pretty obvious. I mean if I dipped into my fund to cover a few bills but then forgot to keep topping up, this would make my emergency fund more like one of those alarms behind a 'break-the-glass' sign. In other words, it'd only be useful once.
 
I think we'd all agree the emergency fund needn't be so dramatic. I just think it's about being sensible with your money no matter the economic climate around us. So, sure, if you can park a small amount each month without greatly impacting your day to day needs, it makes sense. You just never know when it might come in handy.