It always makes sense to have a pool of rainy day savings because it’s a sure thing that at some stage the washing machine will break down or the car will need new tyres to pass rego. However new research shows around half the nation’s households would struggle with an unexpected bill.
A recent study by comparison site Finder found only 41% of households have a stash of at least $5,000 to pay for unexpected expenses. One in three of us have less than $1,000 available in rainy day savings, and one in five don’t have enough saved to cover even a $500 setback.
Without some spare cash under your belt, relatively minor life events can trigger a financial squeeze. Now, while I realise money is tight for plenty of families, having a slush fund of savings is like an insurance policy for your financial wellbeing. And it can be done even when there’s very little fat to trim from the household budget.
Start by working out what you can realistically save each pay day – it doesn’t have to be much. Then set up an automatic payment to directly debit this money from your everyday account to a separate savings account.
If you’re struggling to find spare cash, look at areas where you can cut back or get a better deal. A colleague of mine recently took the step of shopping around to see if she could save on her car’s comprehensive insurance. With the help of Google, in the space of 20 minutes she had switched insurers and pocketed savings of $250.
With tax time coming up, aim to deposit your tax refund into your savings account. Make it an annual habit to boost your cash fund.
Be sure to to claim any government entitlements you may eligible for that can reduce household bills. In New South Wales for instance, families who receive the Family Tax Benefit can apply for a $150 annual Family Energy Rebate.
The beauty of growing an emergency fund is that you won’t have to run up a credit card debt or turn to pay day lenders when the unexpected happens – options that will only make it harder to get ahead with your money.
Once you have some savings behind you, avoid dipping into the account until it’s absolutely necessary. That means not raiding your rainy day savings to pay for those new golf clubs (not really an emergency). Reserve the money for genuine crises, store it in a fee free savings account paying a consistently good rate and you can’t go wrong.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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