Have you thought about whether you have enough cash savings to cover an unexpected car repair, a leaky roof, or to tide you over between jobs? Chances are, like many others, you may not have considered whether you need an emergency fund or how much you should set aside.

An emergency fund is essential to protect you from two types of financial challenges: spending shocks and income shocks.

SPENDING SHOCKS

Financial emergencies often come in the form of unexpected, one-off expenses that need immediate attention. KiwiBank’s first State of Savings index in June 2024 showed that 59 percent of respondents had a budget, and 41 percent had regular savings, but 30 percent would struggle to pay an unexpected $500 expense without having to borrow, sell something, or resort to a credit card. To prepare for spending shocks, a good rule of thumb is to save at least two weeks’ worth of household income and keep it separate from your investments.

Stats NZ have pegged the average weekly expenditure for households in Aotearoa New Zealand in 2023 was $1,598. The amount an average household should be keeping aside for income shocks is at least $3,196.

INCOME SHOCKS

While there’s no single answer to how much you should save for income shocks, there are useful guidelines. One approach is to calculate the cost of running your household and save a multiple of that amount. For example, if it costs you $4,000 per month to cover household expenses, you might aim to save three months’ worth of expenses ($12,000).

If you’re between 30 and 65 years old, with stable employment, consider keeping three months’ worth of expenses in savings. This timeline assumes that if you were to lose your job, you’d likely find new employment within that period. Additionally, spending shocks are unlikely to exceed three months’ worth of expenses, leaving you well-prepared.

WHAT ABOUT RETIREES?

If you’re retired, we recognise that you don’t have regular income, and your available funds may be vulnerable to fluctuations in investment values and returns. It’s prudent to have a greater amount of cash on hand than someone who is still working In this case, you might consider saving between three to twelve months’ worth of expenses in cash. For instance, you could keep three months of household expenses in readily accessible cash and invest the rest across 6-, 9-, and 12-month term deposits. This approach ensures you have at least three months of cash on hand, while maximizing returns on the remaining funds.

PERSONAL CONSIDERATIONS

Several factors influence the amount you should save for both spending and income shocks, including:

• Risk tolerance
• Number of dependents
• Job stability in your industry
• Single or dual-income households

It’s important to find a balance that suits your unique circumstances.

SUMMARY

Ultimately, the best course of action is to consult a financial adviser. They can help tailor a plan based on your specific needs and guide you toward making the best financial decisions for your household.