What is an emergency fund and how does it help me prepare for the unexpected?

Emergency Fund

An emergency fund is a key tool for financial fitness as it acts as a buffer (or self insurance) if unforeseen expenses arise or if something happens to your income. The great thing about an emergency fund is that unlike insurance, there isn’t actually a cost unless something goes wrong.

There is no magic number for you to set aside for an emergency and a prudent amount will depend on your circumstances. A good rule of thumb is to set aside an amount that would cover your (and your family’s) expenses for 2 to 6 months.

Best to intentionally set this money aside in an existing interest paying account or better still set up a separate account so you will not be tempted to access it. Whilst it is advantageous to use an account that pays high interest you should ensure that there are no restrictions on withdrawing the money if the need arises.

Typically an online savings account is good for this purpose as they often have low or no fees and pay competitive interest rates.