Emergency Fund Guide — How Much to Save and Where to Keep It
This article provides general information only and does not constitute financial advice. For advice tailored to your situation, consult a licensed financial adviser. Learn more.
Contents
An emergency fund is money set aside to cover unexpected financial shocks — job loss, car breakdown, medical bills, urgent home repairs. It is the bedrock of financial security. Without one, unexpected expenses force you into debt.
How Much Should Your Emergency Fund Be?
The standard recommendation is 3–6 months of essential living expenses (not 3–6 months of income). Calculate it based on what you actually need each month:
- Rent or mortgage
- Groceries
- Utilities
- Transport
- Insurance premiums
- Loan minimum repayments
- Phone
Example: If your essential monthly expenses are $3,500, a 3-month emergency fund is $10,500, and a 6-month emergency fund is $21,000.
How much is right for you?
| Situation | Recommended fund |
|---|---|
| Stable government or professional job, dual income household | 3 months |
| Single income household | 4–5 months |
| Self-employed, freelance, or casual worker | 6+ months |
| Commission-only income or highly variable earnings | 6–12 months |
| Living in an expensive city (Sydney/Melbourne) with high fixed costs | 6 months+ |
Where to Keep Your Emergency Fund
Your emergency fund needs to be:
- Accessible — you can withdraw it within a business day or two
- Not at risk — not in shares or managed funds where it could lose value just when you need it
- Earning interest — don’t leave it in a zero-interest account
Best options in Australia:
| Account type | Pros | Cons |
|---|---|---|
| High-interest savings account | Good interest, accessible, APRA-protected | Bonus rate conditions may apply |
| ING Savings Maximiser | High bonus rate (with conditions) | Need to meet monthly conditions |
| Macquarie Savings Account | High base rate, no conditions | Rate varies |
| Ubank Save | High rate, linked to everyday account | Digital-only bank |
| Term deposit | Fixed rate, no temptation to spend | Locked in — not ideal for emergency |
Avoid keeping your emergency fund in your everyday transaction account where it blends with spending money. Keep it in a separate, named savings account (e.g., “Emergency Fund”).
How to Build Your Emergency Fund
If starting from scratch
Start with $1,000–$2,000 as a starter emergency fund to cover most car repairs, medical gaps, or appliance replacements. Then work toward the full 3–6 month target.
- Set up a dedicated savings account named “Emergency Fund”
- Automate a transfer on payday (even $100–200 per fortnight to start)
- Apply any windfalls (tax refund, bonus, gift money) directly to the emergency fund until the target is reached
- Once the fund is full, redirect those transfers to other goals
If you have debt
The general order for people with high-interest debt:
- Starter emergency fund (~$1,000–2,000)
- Pay off high-interest debt (credit cards, personal loans)
- Full emergency fund (3–6 months)
- Invest for long-term goals
If you have a mortgage or low-interest HECS debt, you can build the full emergency fund in parallel with making minimum repayments.
What Counts as an Emergency?
An emergency fund is for genuine unexpected necessities, not planned expenses or wants:
| ✅ Emergency | ❌ Not an emergency |
|---|---|
| Job loss / involuntary redundancy | Annual car registration |
| Urgent car repair to get to work | Holiday |
| Unexpected medical bill | New phone upgrade |
| Essential home repair (burst pipe) | Sale items |
| Dental emergency | Planned renovation |
Planned but irregular expenses (car registration, insurance annual premium, rates) should be budgeted for separately — set aside a monthly amount in your budget.
Replenishing Your Emergency Fund
When you use your emergency fund, replenishing it becomes your top financial priority (after covering essentials). Resume your automatic savings transfers until the fund is restored.
FAQ
Should I invest my emergency fund? No — money you may need at short notice should not be in shares or managed funds. Markets can drop significantly (20–30%+) at exactly the time a financial emergency hits — a job loss in a recession, for example. Keep emergency funds in cash or a high-interest savings account.
Is a redraw on my mortgage a substitute for an emergency fund? Using mortgage redraw as an emergency fund is common in Australia but has risks: some lenders restrict redraw access, the bank may change redraw conditions, and drawing from a mortgage extends your loan. It can work for homeowners with substantial redraw but should not replace a cash emergency fund.
How much should a first homebuyer have before buying a home? In addition to the deposit and stamp duty, plan for 1–3% of the property value in an emergency buffer for immediate repairs or unexpected costs after purchase.
See also: How to Budget | Best High-Interest Savings Accounts | How to Get Out of Debt