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Access to money when you’re in a tight spot isn’t a luxury. The trope that ‘money doesn’t buy happiness’ misses the fact that a lack of money impairs not only quality of life but often our own safety.
Having money readily available should be considered a safety priority for all women; whether it’s enough to get an uber home from a bad date, leave a toxic job or even an unhealthy relationship, money means safety first and foremost.
Beyond that, many women want to ensure that the whole household will be looked after if something goes wrong. Emergency funds aren’t just for your safety, they’re also there to keep the family ticking over, even our fur babies. Anyone who has had a surprise vet bill in the past knows the amount of stress they can cause, particularly if you don’t have the funds to hand.
The good news is there’s a decent chance you actually have an emergency fund of some sort already!
If you’re not confident that you have the right amount in the right places however there are a few questions you can ask yourself.
First of all, make sure you’re clear about what the ‘emergency fund’ is for and what you need. You can have multiple emergency funds depending on your situation and needs, for example one for the family and one just for you. Start by answering the following to help work out what you may need.
Is it for just you, or your whole family?
What sort of relationship are you in? do have joint finances and if it goes wrong will it all be relationship property, i.e. divided 50/50?
Do you have a mortgage?
What is your employment situation, do you have sick leave, annual leave or any other support through your work if you need time off?
How likely are you to touch it in the next 12 – 36 months if you’re honest?
There are plenty of ways to protect yourself, and for most of my clients I recommend using multiple financial tools, because there as with anything there are pros and cons for each of them.
Honestly, I very rarely recommend holding money in a savings account, because by doing so you are missing out on the opportunity to have your money working harder for you. However, if you don’t have a mortgage and don’t trust yourself with a credit card, a savings account might make the most sense. They may also make sense in the short term if you are starting out small, say $50 or $100 per pay period.
Many of our clients use either a revolving credit account or an offset account and when we talk to people about them, we focus on the advantages for reducing the interest you pay on your mortgage and paying the debt down faster. However, for many of my clients it is also their emergency fund – for situations like the car breaking down or a family crisis. The downside is that as soon as you dip into the funds you start paying interest on that portion; however, the upside is that compared to other liabilities such as credit cards or car loans it is better to be paying mortgage rates rather than higher interest. The funds are also immediately available, the day you need them, like a savings account except that until you need them, the funds are working for you, by offsetting the mortgage.
This is a great option, especially if you don’t have a mortgage and want your money to be getting you a return rather than being eroded by inflation. There are more risks associated with a managed fund as it is an investment (very similar to your KiwiSaver) which means there will be some volatility, depending on what fund choice you have made. It is also reasonably easy to access, taking from 3-15 working days to get the funds in your account. The advantage of a managed fund is usually that the returns are worth the risk and the slight delay in pulling the money out. This is especially true if you do leave the funds there long-term.
A Managed Fund is best used in conjunction with either a mortgage facility, or a savings account, where you can grab out some money the day you need it, and then repay that or draw down further funds from the investment.
In recent years more people have been interested in term deposits due to the uncertainty in the world, which drives us towards more conservative options, and the higher interest rates offered on them lately. If you want the certainty of return, and either have other funds in savings or your mortgage a TD can be a valid option. The catch for the guaranteed return is the fact that the funds are locked in and if you break into it early, you’ll incur a penalty.
Savings accounts as we have discussed are good for keeping a small portion of your cash as they are fully accessible, but they don’t provide a return, so over the long run your funds will be eroded by inflation, and you want the majority of it elsewhere.
Credit cards, while not technically emergency savings, can be a good thing to have in your back pocket if you want something just for you, as a ‘get me out of here’ option, particularly if you don’t have any savings yet. Like using your mortgage, you will have to pay the debt back, but it does help you out of a pinch and if you have joint bank accounts, a Credit Card can be something in your name only, never a bad idea.
If you’ve read this far and realised you genuinely don’t have an emergency fund, or you want to know how to grow it or separate it out from the household, those are great reasons to come and have a chat. We can help you restructure the mortgage, set up a Managed Fund or even complete a Full Financial Plan so you can see how much surplus you have and make sure you channel it into the areas that are important to you.
Remember – hope for the best, but prepare for the worst, and always know you can ask for help.
Elizabeth.
Elizabeth is the author of the monthly blog What Would She Do? A column for women, by women.
Disclaimer: Elizabeth Tsikanovski (FSP693611) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Elizabeth’s disclosure statement on our website.