Mozo guides

Your essential guide to building an emergency savings fund

emergency savings accounts stored in colourful piggy banks

Whether you’ve lost your rental bond while moving house, or are being hit hard by the rising cost of living, it can pay to have some extra savings up your sleeve—especially if it’s a lump sum solely dedicated to supporting you through difficult financial times.

The benefit of an emergency savings fund is that it can act as a monetary buffer. Not only does this give you peace of mind but also means that your first resort in an emergency won't have to be a personal loan or credit card

Why do I need emergency savings?

You may be saving for multiple goals right now—maybe you're saving for a deposit on a home loan, or building up a holiday fund. But with so much financial uncertainty around, things can just change on a dime, so it's important to be prepared.

Access to emergency savings also means you can retain independence in the event of financial hardship. Your emergency fund should cover the basics such as rent or mortgage repayments, utility costs, groceries and commuting costs. You will also need to keep up obligations like personal loans and credit card repayments to avoid major marks on your credit report.

Having all these costs covered by emergency savings gives you time to think about how to work through your situation without taking on unsustainable debt and without panicking.

Your emergency fund might save you in the event of:

  • An unhealthy work environment: an emergency fund means you can leave a bad work environment ASAP and take time to find a new position without putting you in financial or mental duress. 
  • A break-up: You could still be in a shared living arrangement and need to find a way out. With an emergency fund, you can rely on your saved cash to help you navigate moving costs. 
  • A sudden financial upset: Unemployment, unexpected medical bills, or family finance issues can all happen out of the blue. Access to emergency savings can save you from committing to a line of credit which will accrue interest and cost more in the long run.

How much money should I save in my emergency fund?

It depends on what your basic cost of living is and what your expectations for getting through an emergency are. One common metric for emergency savings is setting aside at least 3 months worth of expenses as a safety net, as this can allow you time to recover in a potentially upsetting set of circumstances. 

According to Mozo research, you need anywhere between $7,000 to $10,000 to build your three-month safety net depending on where you live in Australia. Across the states and territories, the average three-month fund measured out to just over $9,000.

In terms of housing, Australians can spend between 11.7%-21.4% of their income with renters sitting much higher than the 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 applicable
  • 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) 

Don’t go too wild 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 superannuation contributions to help grow that long-term savings pot. 

How long will it take to save my emergency fund?

The time it will take to save for an emergency fund will depend on what your income and expenses are. The best way to figure this out is to budget for a rough savings deposit amount and frequency, and then use the Mozo savings calculator to see how long it will take you to get to your goal. Aiming for 3 months of savings, this is a quick little cheat sheet!

How long will it take to save my emergency stash?

Where should I keep my emergency money?

Ideally, you'll have a separate savings account for your emergency fund that will stop you from dipping into it with everyday expenses. That way, your bundle can accrue interest while it’s in hibernation. Some banks will decrease your interest rate if you withdraw from your 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 paid 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 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.

Consider also any costs you may be able to cut back on to redirect your money to saving. These may include:

  • 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-application account you no longer need or a long-forgotten exercise app, but whatever subscriptions you’re not using should be cancelled.
  • Cut the spending: There may be a few luxuries you’re currently indulging in you could live without as you aim for that emergency savings goal. .

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 unliveable. 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.

Looking to stash your savings?

Here at Mozo, you can compare high interest savings accounts to find the right account for you, or start looking at the options below.

^See information about the Mozo Experts Choice Savings Account Awards

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Cameron Thomson
Cameron Thomson
Money writer

Cameron has a Bachelor of Creative Writing and History, and a background in broadcast media from his time at 2SER Radio. This diverse set of skills has informed his analytical yet creative approach to dissecting financial data and uncovering long-term trends in consumer finance. Cameron is RG146 certified for Generic Knowledge and keeps a keen eye on current and historical deposit and savings rates on the Mozo database. Cameron is also interested in tracking the investment space, particularly share trading platforms, to help Aussie consumers save and invest their money more wisely.