Let’s be honest—having an emergency fund isn’t the most exciting or complex financial strategy out there. But it’s more than just being “responsible.” It’s about freedom.
It’s a taste of short-term financial independence you can enjoy right now. If you’ve ever wanted to throw in the towel at work because your boss is a nightmare, take time off between roles, or explore something new without stressing about where your next paycheck is coming from… an emergency fund makes that possible.
It’s your financial breathing room—the buffer between you and chaos when life doesn’t go to plan.
Why You Need One
An emergency fund is there to cover life’s curveballs—unexpected medical costs, a broken-down car, job loss, or urgent home repairs. It’s the difference between calmly handling the situation or reaching for a credit card and dealing with the financial hangover later.
And it’s not just for accumulators. Retirees (and those nearing retirement) arguably benefit even more. A healthy emergency buffer means they’re not forced to sell down investments at the wrong time or make panic-driven withdrawals. It’s a key defence against sequencing risk—the risk of early retirement withdrawals doing lasting damage.
How Much is Enough?
The typical rule of thumb is to hold 3 to 6 months’ worth of living expenses. But like most things in personal finance—it depends.
If your income is stable, debts are low, and you’ve got access to other liquid assets, you might get by with less. On the flip side, if you’re self-employed, in a commission-based role, supporting a family, or working in a volatile industry, you’ll likely need more.
This is where personalisation matters. A financial adviser can help determine what “enough” looks like based on your lifestyle, goals, and risk profile.
Where to Keep It
This is where many people go wrong. Your emergency fund should not be invested. Even conservative investments carry market risk, and the whole point is to have access to the money immediately—no delays, no red tape, no losses.
Cash is king here. A high-interest savings account is a solid option if you’re debt-free. If you have a mortgage, housing your emergency fund in an offset account or redraw facility can work even harder by reducing the interest on your home loan.
And don’t forget to check whether your account is protected under the Financial Claims Scheme (FCS), which covers deposits up to $250,000 per account holder per bank. It’s an extra layer of safety—just in case.
The Real Benefits
Beyond financial security, an emergency fund gives you:
- Control. You can cover unexpected costs without derailing your plan.
- Confidence. You’re not forced into reactive or poor financial decisions.
- Freedom. You’re not trapped in a job or situation you don’t want. You have options.
It also protects your investments. Keeping a cash buffer reduces the risk of selling growth assets during market downturns—especially important in retirement or volatile markets.
A Few Trade-Offs to Consider
Of course, there are a few compromises.
Cash may not keep up with inflation, so you won’t earn much. But that’s the price you pay for accessibility and certainty.
If you receive Centrelink benefits, large cash balances can affect your asset test and reduce entitlements.
And finally, there’s temptation. The money is right there, and it can be tempting to dip into it for non-essentials. That’s where discipline comes in—this isn’t a slush fund or holiday budget. It’s your financial crutch.
Building It, One Step at a Time
You don’t need to build your emergency fund overnight. Start with a regular transfer—even a small one—and automate it so you don’t even notice. Top it up with any windfalls like bonuses or tax refunds. And once you’ve hit your target, stop.
Holding surplus cash above your emergency fund target isn’t efficient. Cash doesn’t work hard, and once your buffer is set, the greater risk becomes inflation—not shortage.
Review it once a year, adjust if your lifestyle changes, and move any excess to investments that work harder for you. Think of it as a living, breathing part of your financial ecosystem—not something to set and forget or endlessly grow.
The Guided Investor approach
If financial independence is the long-term goal, an emergency fund is how you start living that reality today. It gives you flexibility, confidence, and peace of mind—without needing millions in the bank.
That’s why, as part of Phase 1 of Wealth Creation, we make sure every client has an adequate emergency fund—tailored to their needs and housed appropriately.
