Building an emergency fund might feel like another financial challenge when the cost of living is already putting pressure on household budgets. But with 44% of Kiwis without one, having even a small amount set aside could make the difference between covering an unexpected expense and turning to high-interest debt.
Why an emergency fund matters
An emergency fund is money set aside specifically for the moments when life doesn’t go to plan.
A car could break down, the fridge might need replacing, you could face an unexpected medical bill or illness could leave you unable to work for a period of time. These expenses can arrive without much warning, and without savings available, short-term debt can quickly become the fallback.
As James and Mike discuss, only one in three Kiwis could survive for more than one month if they lost their job, while only one in four could make it beyond three months.
That becomes particularly concerning when the alternative could be a credit card or personal loan charging somewhere between 12% and more than 20%.
The challenge is that building savings can feel overwhelming when the cost of living is already high. Rather than immediately aiming for tens of thousands of dollars, the focus can be on making the first step achievable.
Start your emergency fund with $1,000
For someone without an emergency fund, James and Mike suggest starting with a much more manageable target: $1,000.
That first $1,000 provides a buffer for smaller emergencies and can help prevent an unexpected expense from immediately going onto a credit card or personal loan.
It can even take priority over aggressively paying down short-term debt.
The reasoning is simple. If every spare dollar goes towards paying off debt and another emergency happens, you could end up borrowing again to pay for it. Building the initial $1,000 first gives you something to fall back on before turning your attention towards eliminating short-term debt.
Once that debt has been addressed, you can begin working towards a larger emergency fund.
Understand where your money is going
Finding an extra $1,000 is easier said than done, particularly when finances are already tight.
The first step is understanding what is actually happening with your cashflow.
Look back at roughly the last three months of spending and identify where your money has been going. This can be done using a budgeting tool or by reviewing your bank transactions.
The results might be uncomfortable, but understanding your historical spending gives you a starting point.
From there, the question changes from “Where has my money gone?” to “Where do I want my money to go?”
That means setting a realistic budget and defining what you are actually trying to achieve. Going too hard too early can make a savings goal difficult to sustain and ultimately set you up to abandon it.
Could the 50/30/20 rule work for you?
One budgeting framework discussed in the episode is the 50/30/20 rule.
Under this approach:
- 50% of income goes towards essentials such as housing, food, utilities and transport.
- 30% goes towards lifestyle spending.
- 20% goes towards savings and investments.
That final 20% could initially be directed towards building your $1,000 emergency fund.
However, the percentages are only a guide.
With the cost of living putting pressure on household expenses, those exact numbers may not be realistic for everyone. Instead, take stock of your own finances, understand your expenses and adapt the concept to your circumstances.
Look for opportunities to free up cash
Once you understand where your money is going, look for areas where you could reduce expenses.
Subscriptions are one place to start. Check what you’re paying for and whether you actually use everything you’re subscribed to.
Insurance is another expense worth reviewing. Rather than simply accepting the annual renewal, look at whether the amount you’re paying is still appropriate and whether you could get a better deal.
Even smaller changes can help. Going to the supermarket with a list rather than browsing can reduce unnecessary spending, while selling things around the house that you no longer need could give your emergency savings an initial boost.
There may also be opportunities to increase your income.
If you have a trade or professional skill that can be used outside your normal working hours, additional work could provide extra cash to put towards your goal. Longer term, think about your career and what you could do to increase your value and earning potential at work.
Break your savings goal into smaller steps
Saving $1,000 can feel much more achievable when you break the target down.
As Mike explains:
- Saving $20 per week gets you there in 50 weeks.
- Saving $40 per week gets you there in 25 weeks.
- Saving $50 per week gets you there in 20 weeks.
- Saving $100 per week gets you there in 10 weeks.
The important part isn’t reaching the goal as quickly as possible. It is finding an amount you can consistently afford.
If reaching $1,000 in ten weeks requires changes to your lifestyle that you know you won’t maintain, extend the timeframe.
Understand your expenses, choose a realistic target and then consistently put money aside each time you get paid.
How much should you eventually have saved?
The first $1,000 is exactly that: a starting point.
Once you have that initial buffer, the next priority discussed in the episode is paying down short-term debt before building a larger emergency fund.
James and Mike suggest eventually aiming for around three to six months of expenses.
The right amount depends on your circumstances, including how consistent your income is. Three months may be a reasonable target for many people, but it takes time to build towards that level.
The important part is getting started rather than feeling like you need to have several months of expenses sitting in the bank immediately.
Where should you keep your emergency fund?
An emergency fund isn’t designed to generate the highest possible investment return.
Its job is to be there when you need it.
That means keeping the money highly liquid and accepting that it may earn a relatively low return. James specifically cautions against putting emergency savings into assets such as shares or crypto.
Revolving credit can be more complicated. While it may help offset interest costs, it can also create temptation to spend money that was supposed to be reserved for emergencies.
Mike says he generally prefers offset facilities because the money remains your own rather than effectively becoming part of a bank overdraft. However, the right approach ultimately depends on how well someone manages their spending and savings.
Key takeaways
- 44% of Kiwis don’t have an emergency fund.
- An emergency fund can help cover unexpected costs without immediately relying on high-interest short-term debt.
- You don’t need to start with three or six months of expenses — $1,000 can be a practical first target.
- Building that first $1,000 can come before aggressively paying down short-term debt, providing a buffer if another emergency occurs.
- Review your historical spending before creating a realistic budget for the future.
- Budgeting frameworks such as the 50/30/20 rule are guides and should be adapted to your circumstances.
- Reviewing subscriptions, insurance and everyday spending could help free up money for savings.
- Breaking $1,000 into a weekly savings target can make the goal feel much more manageable.
- Once short-term debt is under control, work towards building around three to six months of expenses.
- Emergency savings should be accessible rather than invested with the goal of maximising returns.
Next Steps:
If you’d like to watch more, check out this episode below.
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Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
