Your essential guide to building an emergency savings fund

By Olivia Gee ·

Having a solid savings back-up in a crisis is invaluable. Whether you’ve lost your rental bond while moving house, or lost your job because of a major economic downturn, it pays to have a little extra up your sleeve that’s solely dedicated to supporting you through a difficult financial time.

An emergency savings fund is a separate money bundle that can cover unexpected, urgent and essential costs so you don’t have to take out loans, credit cards or borrow from other sources in an emergency. While it sounds pretty straightforward, there is a lot to consider when it comes to such a cash stash, from where you should be accruing the fund to when it’s appropriate to withdraw from it. So, here are your essential emergency fund questions answered. 

Why should I prioritise my emergency savings buffer?

You may be saving for multiple goals right now – perhaps a deposit so you can take out a home loan or spending money for that dream holiday. But if things go belly-up, wouldn’t you rather make a withdrawal from your emergency savings pot than wrench cash away from those more hopeful endeavours? 

It also means you can retain your independence. Your emergency fund should cover the basics – rent or mortgage repayments, utility costs, groceries and daily travel costs – and allow you to keep up with any other financial obligations like personal loans and credit card repayments. 

Having all these costs preemptively covered for a reasonable amount of time allows you to make the most wise choices in a stressful situation. A few ways your emergency fund might save you include:
If you’re in an unhealthy work environment, it means you can leave ASAP and take time to find a new position. 

If your relationship is over but your shared living arrangement isn’t, you can rely on emergency dollars to help navigate moving costs. 

If you’re suddenly facing unemployment, unexpected medical bills, or family finance issues, you can pay these without committing to a line of credit that will accrue interest and cost more down the road.

How much money should I save for emergencies?

This is really dependent on your basic living costs and your expectations for getting through an emergency. The minimum three-month rule, where you have enough stashed away to cover all your daily expenditures for at least 90 days, is a common measure. Mozo research shows you need between approximately $7,000 and $10,000 to build your three-month safety net depending on where you live in Australia. Costs across the eight states and territories amounted to an average three-month fund of just over $9,000.

For some scope, Australians typically spend between 11.7%-21.4% of their income on housing with renters sitting much higher than this average compared to homeowners, and those living in metropolitan areas of Hobart, Sydney and Adelaide seeing the highest rental rates. After considering housing, you’ll need to look at:

  • utility costs (electricity, gas, internet and phone bills)

  • basic food and household items

  • daily travel (via public transport or a personal vehicle)
  • car, home and life insurance if appropriate
  • loan and credit card repayments 
  • occasional expenses like car repairs, or medical and dental checks
  • one-off purchases like clothing or a meal out
  • extra expenses that may pile on top of emergency costs (perhaps you’ve lost your job but also need to buy a laptop, as you used the work device for personal admin) 

But don’t overdo it on the savings front. While you may feel more secure squirrelling away as much rainy day money as possible, you also need to assess other financial goals. You may have loans to pay off, or could be making super contributions to help grow that long-term savings pot. Think of emergency savings like insurance: you want just enough coverage to get you through.

How long will it take to save my emergency stash?

Again, this depends entirely on your income and expenses. The best way to figure this out is to budget for a rough savings deposit amount and frequency, and then use Mozo’s savings calculator to see how long it’ll take you to get to your goal. If you’re aiming for Mozo’s three-month emergency fund average, check out our savings timeline cheat sheet.

How long will it take to save my emergency stash?

Where should I keep my emergency money?

It’s important to have a dedicated account for your emergency fund, so you don’t dip into the amount for non-emergent spending. Ideally, you’d want a savings account with high interest and no ongoing fees so your bundle can grow while it’s in hibernation. Many banks will decrease your interest rate if you withdraw from such an account, so make sure you only do so when absolutely necessary.

If you have a mortgage, you might consider an offset account as a home for your emergency cash. By depositing money in an account attached to your home loan, you can reduce the interest you pay on your mortgage as the loan principal is balanced out by this additional sum. It’s a simple way to reduce this basic living cost and enhance savings contributions.

What are some hot tips for reaching my emergency savings goal?

Have a budget: Knowing and maintaining your living costs will help you set a savings schedule and the amount you can feasibly put away each pay cycle, whether it’s weekly or monthly. If you don’t think you can find extra dosh in your current budget, it may be time to find ways to cut set costs.

  • Have a set $ goal: Decide on the emergency savings amount you want to hit. Then, divide that by your budgeted savings amount each period and you’ll have organised a timeframe in which to get there. 
  • Adjust savings when applicable: Some weeks will be fairer than others, considering bill payment dates and the occasional social splurge. So allow for some flexibility in your savings while maintaining healthy financial habits by sticking to payment frequency but increasing or decreasing deposit amounts when appropriate.
  • Set up automatic transfers: If you haven’t been a scrupulous saver in the past, setting up a regulated bank transfer from wherever your income is deposited to your emergency savings account will keep you on track.
Emergency savings guide
  • Energy providers: As always, we implore you to shop around and find the best deal on the market for all your utility costs
  • Home loan options: If you’ve been happily chipping away at your mortgage for some time, you might not have investigated how competitive your rates are. Look into refinancing to potentially make some big bucks that’ll help out in tough times.
  • Insurance costs: Again, you want to be as efficient as possible with set costs like insurance, so make sure you’ve updated your plans to suit your current needs and reduce unnecessary costs whenever possible.
  • Other accounts: Are you paying fees or getting a poor interest return on your savings accounts or term deposits? If you’ve got a few accounts bubbling away, this could add up to a considerable amount, so keep it in check.
  • Unloved subscriptions: It might be a job-seeker account you no longer need or a long-forgotten exercise app, but whatever subscriptions you’re not using should be cancelled.
  • Cut the spending fat:There may be a few luxuries you’re currently indulging in you could live without as you aim for that emergency savings goal. If possible, replace takeaway lunches or dinners with home cooked meals, shop with an essentials-only grocery list, and walk, cycle or use public transportation instead of making petrol-guzzling car journeys.

When should I use my emergency savings?

To assess whether or not something classifies as an emergency, you should first identify if the situation is: 

  • Unexpected: An emergency isn’t a looming debt you’ve been ignoring for months. Save on stress and extra fees by paying off loans and other costs in a timely manner instead of scrambling for finances in the final hour.
  • Urgent: Does it need to be sorted within your next pay cycle? If not, and if you’ve got the cash at hand to cover it, it’s most likely not an emergency.
  • Necessary: If your income can sufficiently sort things, don’t dip into the emergency fund.

There are many circumstances that might fall under all these categories, from the washing machine breaking to your house suffering fire or water damage and becoming unlivable. The problem may only require a few hundred dollars, or it could eat up the best part of your emergency stash. All the more reason to come financially prepared for any and all eventualities.

Olivia Gee
Olivia Gee
Money writer

As one of Mozo’s money writers, Olivia Gee shares her research and insights across banking, insurance and property to help readers save. She loves getting stuck into a story, unveiling all the facts, breaking down stats and drawing on personal experiences - this is what drives her as a journalist. She has a double degree from the University of Wollongong, with a BA in Journalism as well as Media and Communications.