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There’s a hole in my (rainy day) bucket!

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I have a confession to make…..I don’t have an emergency fund.

I know, I know, but on the plus side, my partner and I have finally had THAT chat (the one where we bare our financial souls), and we are now setting one up.

What is an Emergency Fund? Generally speaking, it’s a cash reserve of 3-6 months’ worth of expenses that is put aside for events like redundancy, unexpected bills, the hot water cylinder going pop or illness. It’s not necessarily 3-6 months of income because in the event of illness, you’d generally cut right back to basics, stop the take-aways and make do with the clothes you’ve already got, so it’s your actual basic costs.

In 11 years of giving clients financial advice, establishing an emergency fund is one of the core pieces of advice I give to clients. It’s a classic case of the lawyer not having a will, the accountant filing their own tax returns late…. the financial adviser not having an emergency fund; Not taking my own advice, and just never getting around to sorting something out.

It’s very hard to see such a large amount of money doing nothing. We all have our own “money personalities” which has been advertised quite a bit lately. I’m a spender, and all I can see in a savings account is all the things that I could do with the money instead. For me, the trick will be to put the money where I can’t see it, perhaps in a high interest bank account that is NOT visible on my online banking.

The chat with my partner was a hard one. We both went through our income and fixed outgoings and were totally honest about what we were spending (and not saving). We had never discussed what we were trying to achieve financially together. Do we want to retire early, do we want to redo the kitchen in the next few years, do we want an annual holiday, or do we want to prioritise mortgage repayments and be mortgage free by 50? For a household budget to work, all the key decision makers in the household need to be onboard. Whilst we both knew we aren’t saving enough, and each had ideas about what we should be doing, we hadn’t made the time to discuss it together and come up with a plan.

For us, the main overspend is groceries. When we added up all the money spent on various shopping trips during the week, takeaways when we couldn’t be bothered cooking, bought lunches when we hadn’t made time to prepare a packed lunch (even though we do them for the kids!), the total shocked us a little.

We then worked out that by making the cut backs we think we can, we can have a reasonable emergency fund within 2 years. Emergency funds don’t have to be instant, they can build up over time. Once we have done this, we will make our next financial goal, but for now that is the priority.

Last week, The Commission for Financial Capability’s (CFFC) education manager, David Boyle, proposed that KiwiSaver members to be able put money aside for an emergency. Under his proposal, the 3% salary deduction would first go to fill up the emergency fund, and once this was full, would go into KiwiSaver. This would then be available to draw on in an emergency, without the KiwiSaver member having to go through the financial hardship process. I would rather see this as an add on to KiwiSaver with the 3% going to the KiwiSaver fund and an additional amount filling up an emergency fund, otherwise it takes away from the core of what KiwiSaver is; retirement savings.

The proposal is that KiwiSaver Providers put a couple of hurdles up to make sure that it’s not TOO easy (and thus tempting) to withdraw from.

I will watch with interest how this develops, but love the idea that an Emergency Fund, or Rainy-Day Bucket could become an actual thing! Until then, I will keep advising my clients to establish an emergency fund if they don’t already have one. I will also, finally, start my own one and do my best to make sure it doesn’t spring a leak!

There is more information on the CCFC’s proposal here.