Having no, or a diminished, emergency fund leaves you at risk of letting a relatively small emergency turn into a more serious debt issue. All it takes is an unexpected medical or dental bill, or the washing machine to die and your finances can implode if you don’t have a buffer to pick up the slack. And you know how much these sorts of things like to happen all at once...

Taking a bit of pain now to build a safety net can save you a financial migraine later.

How much do I need?

If you’re starting from scratch, sorted.org.nz suggests putting $1000 aside as soon as you can. It recommends doing this by selling a few things you don’t need or doing some extra work, whatever you need to do to build that small buffer. This will give you a starting point for covering those smaller emergency bills that can spring up from nowhere when you least expect it.

However, the experts recommend tucking away more like three months of expenses. MoneyHub.co.nz suggests between three to six months’ worth. It says many people will need between $10,000 and $20,000. Just how much you need depends on your particular circumstances. If you have dependents, you’re going to need more than someone who doesn’t. The sort of insurances you have in place make a difference too.

Figure out how much you spend on essentials each month (don’t forget things that you have to pay regularly, but aren’t every month, like say council rates) and then times that by three to six months to figure out how big your fund needs to be.

But how will I find that money?

Start small. Get your budget in order first, so you know how much you can afford to put away and how much you’ll need to cover all your expenses. Check out Lifetime’s free Budget Planner to help you.

Cut out any unnecessary items and redirect that money into your emergency savings (are there any zombie monthly subscriptions you could get rid of and use that money, for instance?). Set up an automatic payment to whip that cash away each week before you even notice it.

Then top it up with any extra money you might get from things like extra hours at work, tax refunds or bonuses. Getting that fund squared away will give you much more security further down the track. MoneyHub.co.nz recommends checking out ASB’s Save the Change app. It rounds up any purchases you make to a preset amount and pops the difference between the purchase price and the rounded amount into your savings account. That way you’re building up your emergency funds each time you shop.

Please remember, there are some things an emergency fund is not. It’s not for saving up for a new car, or an overseas trip. And it’s not for paying off your credit card bill. So don’t touch it unless it really is an unexpected emergency.

Where should I keep my emergency fund?

Keep it separate from the rest of your cash. Open up a savings account with a good interest rate, such as an online saver account. But remember, you need to be able to access this money straight away in an emergency, so it can’t be locked up in a term deposit. Also, try not to link it to your EFTPOS card - you don’t want to be tempted to use it. Perhaps hold the account with a different bank to your day-to-day banking.

Once this is all done, you can put your head down and enjoy sleeping a bit more soundly at night.

Written by: Sonia Speedy

Sonia Speedy has been a journalist for over 20 years, working in newspapers, magazines and radio. She also runs an online platform for parents at familytimes.co.nz. She lives on the Kāpiti Coast with her young family and loves writing stories that help make people's lives easier.