The simple money mistake most Aussies are making

2020 was a wild ride financially (and mentally). We saw a lot of economic uncertainty, a spike in the unemployment rate, a recession and billions of dollars spent in government stimulus. While this year is (so far) looking to be smoother and the recession is technically over, we're not out of the woods just yet.

However, despite continued economic uncertainty, new Finder research shows that 71% of Australians don't have an emergency fund. That's the equivalent of around 14 million people with no dedicated cash safety net on hand if things took an unexpected turn for the worse.

An emergency fund is separate to your regular savings and the money in your bank account; it's a dedicated account that's there just for urgent or unexpected costs.

Why you should have an emergency fund in 2021

If you were to suddenly lose your job, how long could you cover your regular expenses without dipping into investments? According to Finder data, around 39% of Aussies could survive on their savings for just one month or less if they were to lose their job tomorrow.

While we all like to think we'll never need it and our income is secure, 2020 proved that it's better to be safe than sorry. Last year also proved that you can never be too prepared, and you can't predict what's around the corner. After all, no one predicted there would be a global pandemic that would drive economies into recession and force entire workforces to switch to remote work for the better part of a year.

If you've got most of your money tied up in shares, you might lose a fair bit of it in the short term while the share market remains incredibly volatile. Of course, if you're investing for the long term then shares are a great way to build your wealth. But you can't rely solely on shares as an emergency fund.

Similarly, you can't rely entirely on property for an emergency fund either. Property isn't a liquid asset, so if you need cash quickly (like if you were made redundant or faced with a big unexpected expense), it could take a while to access money from your property.

A savings account is a good option for an emergency fund as you can access the money easily and instantly at any time. It's also not going to fall in value like it could in the share market.

Yes, interest rates on savings accounts are incredibly low right now. But these accounts are also one of the safest places to store some emergency cash, as deposits up to $250,000 are guaranteed by the government.

Tips to set up an emergency fund

Here are a few tips to help you set up an emergency fund in 2021:

• Figure out how much money you need. A good amount to aim for in your emergency fund is at least three months' worth of living expenses. If you can keep even more than this, that's even better. 

• Check the account conditions for interest. Savings accounts all have different conditions to meet to earn bonus interest. Check what they are before you open the account and make sure they're easy for you to meet, otherwise, you may not earn much interest at all. 

• Build your fund gradually. It's not always realistic to put three months of living expenses away in a separate account in one go. An emergency fund isn't something you need to build overnight. Once you know how much you want to have in there, set up a regular weekly or monthly automatic transfer for small amounts so it's more manageable. 

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