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No emergency fund? It's not too late

Hindsight is great, isn’t it? If we knew a year ago what 2020 was going to look like, we would have all saved up and built a nice emergency fund to navigate these unprecedent times. Although it’s hard to predict what will happen in the coming months, general consensus is that we are looking at an economic recession that will affect all New Zealanders. When recession hits and the unemployment rate goes up, it’s important to have an emergency fund we can rely on.

You’re not alone

If you don’t have an emergency fund, you’re not alone. Data published by the Reserve Bank in 2019 shows that New Zealanders saved -0.3%. That means that, as a nation, we didn’t save at all.

When putting together a financial plan for our clients, looking at all the pieces of their financial health puzzle, we recommend that they have an emergency fund consisting of 3 months’ worth of expenses. The emergency fund needs to be easily accessible. That doesn’t necessarily mean that you need to have cash sitting in the bank, it could be money that you can re-draw from your mortgage or your investment.

If you don’t have an emergency fund, now is a great time to get started.

How the lock-down might give you a head start

The lock-down period might have already provided some breathing space to your wallet, if you are still employed and your income hasn’t been affected.

When looking at your expenses for the last month it will be easy for you to pinpoint your “essentials”. Food, power, water, mortgage/rent, medical expenses and insurance are your non-negotiables. Whatever happens, those are the expenses you will need to cover at any point in time.

So, what about the surplus? Save, save, save! Whatever you can reasonably put away, do so. Let the savings you made during lock-down kick start your emergency fund. Don’t go back to your normal spending habits if they were not helping you.

Have a plan

Failing to plan is planning to fail. Even if you don’t have an emergency fund at this stage, don’t get discouraged. Start by putting together a plan. Understand how much you will need and plan how much you can save each month.

Go through different scenarios of reduced income – what would happen if you lost a percentage of your income or if you went to a one-income household? Knowing that even in those scenarios you can cover your essentials will ease your worries.

Get started with 5 easy steps

  1. Understand your essential expenses and start saving
  2. If you are foreseeing financial hardship ahead, talk to an expert now and understand your options
  3. Get rid of dumb debt – paying down credit card debt and personal loans should be top priority
  4. Have a flexible mortgage structure – have your salary credited to your mortgage to save on interest and/or have the ability to re-draw if needed
  5. Have the right level of insurance – understand what you need to be covered for and don’t pay for things you don’t need or want

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