May 2023
Why an emergency fund delivers peace of mind
When life tosses up an unexpected event – such as retrenchment, a medical emergency or even just a big bill to fix the car – it can be nerve-wracking worrying about how to deal with the crisis. And, if funds are short, that just adds to the stress.
But imagine that you have a secret cash stash – an emergency fund – that will cover the costs, giving you the mental space to deal with the problem.
In fact, an emergency fund is the basis for a strong financial strategy and provides a crucial safety net. It makes sense regardless of your age or income because the unexpected can happen to anyone.
Without a cash reserve, you may have to rely on credit cards or loans, which can put a further strain on your financial situation and your mental health.
An emergency fund gives you the peace of mind to be able to weather the storms that come your way without racking up unwanted debt and interest payments.
How much is enough?
Of course, it can be tough to save when inflation is eating away at your income. Rising interest rates, rents and the cost of groceries is putting a big strain on households. The Australian Bureau of Statistics reports that household savings have been declining for more than a year as people contend with increased mortgage payments among the other rising costs.i
Nonetheless, by putting aside even a small but regular payment into a separate fund you will slowly accumulate enough to cover emergencies.
The size of your emergency fund depends on your own circumstances but an often quoted target is enough to cover between three and six months of living expenses.
It may differ if say, you are planning on starting a family and need funds in reserve to cover the difference between parental leave payments and a salary; you have children in school and want to be able to cover school fees for a year or more, no matter what happens; you need to take time off work to care for a family member; or you need to make an unplanned trip.
On the other hand, if you have retired, it can be helpful to have a buffer against market volatility. If there is a downturn in the markets and your superannuation is not providing your desired level of income, a year’s worth of living expenses in an emergency fund can make all the difference to your lifestyle.
The main thing to remember is that if you need to raid your emergency fund, start work on rebuilding it as quickly as possible.
Building your fund
Putting together a budget can help you to analyse how much you can afford to put away every week, fortnight or month. Then, consistently saving until you reach your goal is the key, no matter how small the amount.
It is best to keep your emergency fund separate from your everyday transaction account to reduce the chance of you using your saved funds for regular expenses. One option is to pay yourself first by setting up a direct debit, so your emergency fund grows automatically with no extra action needed from you, and to avoid the temptation to withdraw your savings.
The type of account you choose for your emergency fund is important. It should be readily available so, while shares and term deposits may offer higher returns, they are not quickly accessible when required. Shop around for a bank account that offers the highest interest to get the most out of your hard-earned income.
Building an emergency fund is an essential component of a strong financial plan, providing a safety net should something unexpected arise. If you are unsure of the best way to set up an emergency fund, we encourage you to reach out to us. We can provide guidance on the best options for your unique financial situation and help you take steps towards
Getting your bounce back
Life is pretty frantic, and it is common to feel like it’s a struggle to keep up the pace. In fact, feeling exhausted is so common that it has its own acronym, TATT, which stands for “tired all the time”.
While it’s somewhat comforting to know you’re not alone, it’s certainly not a nice feeling, so let’s look at some of the best ways to get some bounce back into your step.
Watch what you take on
One of the first and most obvious things is to look at your busy lifestyle and see if something has to give.
Don’t be afraid to decline invitations if you are feeling overcommitted, in particular say no to the things that are a drain on you physically or emotionally. No one can be busy 100% of the time and it’s important to ensure you have a little downtime to just do sweet nothing – even if you need to schedule it into your calendar!
As you manage your time think about what is most important to you and prioritise things that make you happy and give you energy.
Catching some zzzz’s
Of course, the most powerful downtime, is getting a good night’s sleep. If you are not a great sleeper making some small tweaks to your evening routine can help. Anything you can do to wind down, be it having a hot bath or reading a book, is great for getting in the right zone for a restful night’s sleep.
Avoiding screen time for an hour or two before bed is beneficial as the blue light from laptops and phones is known to trick your brain into thinking it’s still daytime. This reduces hormones like melatonin, which help you relax and get deep sleep.
And while caffeine may be your friend if you are feeling a little lacklustre, it’s not ideal to have caffeine after 3-4pm if you want to have a good night’s sleep.
Stress less to recharge your batteries
Winding down can be easier said than done, however – often we don’t even realise how stressed we are until it gets to a point where it creates a problem for us.
Being in a constantly anxious state is draining. Our body is sending messages to put us on high alert – the fight or flight response – which is fine for short periods of time, but when it’s constant our batteries get drained pretty quickly.
Simple practices like deep breathing and progressive muscle relaxation can be very effective in reducing stress and improving energy and don’t have to take a lot of time or effort.
The right fuel for sustained energy
No amount of relaxation or rest is going to help, if we are not giving our bodies the best fuel for energy. We can’t expect to perform at our peak if we are running on fumes, which is where a balanced diet and hydration are key. Sugar in particular, is a culprit in giving you a burst of energy and then a crash, so instead of reaching for that chocolate bar mid-afternoon, try a handful of nuts or a banana for an energy boost.
Another easy tweak is to make sure you are drinking enough water. Just putting a jug in easy reach on your desk can be enough to have you humming along through the day.
Get your body moving for an energy boost
The last thing you probably feel like doing if you feel exhausted is to pop on your running shoes or go out for a brisk walk, but getting your blood pumping and your heart beating fast is a great way to shake off the cobwebs and boost your energy. It’s important to listen to your body and pace yourself but expanding energy is a great way to create more energy!
Life is to be lived and making some tweaks to your lifestyle and routine might just help you get that boost you need to enjoy life to the fullest.
Note: It’s important to also consider that chronic tiredness can have a medical cause, so be sure and see your doctor if you have any concerns about your overall health.
Three simple steps for financial wellness
If money’s too tight to mention, here’s some small steps that can make a big difference in achieving your financial goals.
How would you rate your level of financial wellness?
Do you think you’re in a good position to meet your immediate and near-term financial obligations? What about your long-term goals?
They’re tough questions, asked in a particularly tough financial environment.
The sharp rise in general living expenses over recent times has spurred central banks to raise interest rates in a bid to quell consumer demand.
Many households are already under increased financial pressure, and further rate rises are on the cards. Investment returns, including superannuation returns, have also fallen.
Yet, in assessing your level of financial wellness, it’s important to look beyond short-term events.
Sure, they definitely feed into the overall equation. Household budgets are likely to be stretched until economic conditions normalise.
But also consider whether your financial wellness is on track in terms of your future, longer-term financial goals. This includes your regular investing strategy, both inside and outside of superannuation.
This three-step framework for financial wellness may help you to identify strategies to improve your financial wellness in order to meet your shorter-term financial obligations, and to keep you on track in terms of your longer-term goals.
Step 1: Take control of your finances
Taking control of your finances largely comes down to understanding everything about your finances – the amount of money you receive in regular and ad hoc income, the amount you need to spend on general living expenses, the money being put towards specific goals (such as a house or car), and what’s left over (your savings).
Consider implementing a budgeting strategy, if you don’t already have one, to track all your expenses and identify where potential savings could be made so you can build momentum towards achieving your short-term and long-term objectives.
Reductions in certain expenses could be used towards paying off high-interest debts, such as outstanding credit card balances, and ensuring you can pay the minimum payments on all debts.
Step 2: Prepare for the unexpected
Having better control over your money will invariably put you in a stronger position to build wealth over time.
Protecting your wealth as it grows is important, and that means preparing for the unexpected.
Households can benefit from setting aside emergency savings to cover modest, unexpected expenses for when an inevitable or unlikely event occurs.
Think of events such as unexpectedly losing your job or a sudden drop in the income you generate from your business activities, and unforeseen spending shocks that can eat into your accumulated savings.
Emergency savings can ensure you have some cushions in place to help reduce the potential impacts of such events on your household budget, financial plans, and goals.
Insurance cover is also an important component of financial wellness and protecting against unexpected or unwanted financial losses. Common types of policies include health, life, disability, trauma, and income protection cover.
Given insurance premiums can be high, striking a balance between risks, costs, and coverages is prudent.
Step 3. Make progress toward your goals
To achieve your long-term financial goals, it makes sense to remove any impediments that will stand in the way of attaining them.
Step 3 of the financial wellness framework focuses on strategies such as paying off longer-term debts, such as your home mortgage. Paying higher-interest debt first will save on interest.
Depending on your life stage and investment trade-offs, you can choose to either pay down lower-interest debt, using money previously allocated to investing, or to rely on your budget and one-time windfalls to accelerate the paydown strategy.
However, having cash on hand may also be important for your peace of mind. Directing more money toward paying debt forgoes liquidity in the short term, so evaluate whether you need cash in the short term.
Also, consider using accounts paying higher interest to save for shorter-term goals, such as buying or paying off a house, vehicles, funding a holiday, or in order to retire early (before you’re able to start accessing your superannuation).
Conclusion
Attaining a high level of financial wellness comes down to a range of strategies, but first and foremost it’s about taking control of your personal finances.
Just doing simple things, like having a household budgeting system, can make an enormous difference in helping you to understand how your money is being allocated, and where you can potentially save on costs.
Having a financial buffer, or war chest, is also important to cater for unexpected events such as a major unforeseen expense, or if you suddenly lose regular income.
Think about having investments that are liquid enough to access if you need extra cash, which can include money you have invested in exchange traded funds or managed funds.
Lastly, always stay focused on your long-term goals and use a range of strategies to achieve them, such as reducing your debts over time.
Taking direct action with your finances will greatly improve your chances of achieving investment success over the long term.
Source: Vanguard February 2023
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2022 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.