What is an emergency fund?
It's an amount of money set aside in a separate bank account just in case something happens that you hadn't planned on - effectively 'Rainy Day Money'.
Why do I need it?
Money is one of the most stressful things that many people deal with in life. When we get large unexpected bills, or if we are off work, it's useful to have this money so you don't need to put the bills on your credit card, borrow money from other sources or face the stress that comes with these unplanned expenses.
How much do I need?
Ideally you want at least three months (or in an ideal world six months) of your expenses or living costs tucked away. To work out how much that is for you, look at your budget and see how much your expenses are each month. If you don't have a budget then write down a list of all the things you need to spend money on each month and total up the amounts. For example if you need $3,000 you will need at least $9,000 in your emergency account. If you need $5,000 per month to live on then you will need to put away $15,000.
What happens if I don't have this money?
You can do a combination of starting to save a certain amount every pay cheque to build it up. Or can you have a garage sale to sell things that you no longer need or use. Alternatively if you have some liquid assets (assets that you can sell quickly to get cash) like some shares or bonus bonds then these can account for emergency money.
Can I use my Revolving Credit or Flexi facility on my mortgage?
Yes you can, although you will still pay interest on the money you use. I always issue a warning with these mortgages; I think they can be fantastic tools for efficiently managing your money but only in the hands of those with pretty good discipline with their money and who track their expenditure and have a clear understanding of how to use these facilities. In my experience, most people don't fit into this category.
Tip:
If you have a minimum of three months of expenditure in an emergency account then you can consider taking a longer stand down period (the period you have to wait to paid) on your income protection policy - this can save a significant amount on your monthly premiums.
