Emergency funds are often talked about as one of the foundations of good financial planning. The usual advice is to keep enough money aside to cover unexpected expenses or a period without income. It is sensible advice. But for many people, it may not feel especially realistic right now.
When most, or all, of your income is already going towards housing, groceries, power, transport and other essentials, finding extra money to put into savings can be difficult. For some households, there may simply be nothing left at the end of the week or month. In that situation, being told to build an emergency fund can feel less like useful advice and more like another financial target that is out of reach.
A good financial plan needs to start somewhere else. It needs to start with where you are today.
Financial resilience is not a pass or fail test
Having money set aside for unexpected expenses can provide valuable breathing room. A car repair, an insurance excess, an urgent trip to the dentist or time away from work can be much easier to manage when there is some cash available. But financial resilience is not something you either have or don't have.
If you currently have no emergency savings, that does not mean financial planning has to wait until you are in a stronger position. The first step may simply be understanding where the pressure is coming from.
What are your essential expenses? What debts or repayments are taking up a large part of your income? Are there large costs coming up that you can anticipate? If something unexpected happened tomorrow, what options would currently be available to you? Those questions may not immediately create spare cash, but they can help build a clearer picture of where the biggest financial risks are. And that is an important part of financial planning.
Sometimes there genuinely is nothing left to save
There is plenty of financial advice built around finding a small amount to put aside each week. For some people, that will be achievable. For others, it will not.
If your household income is already fully committed to essentials, the answer is not necessarily to search harder for something else to cut. The more useful question may be: what can we do with the resources that are available?
That might mean looking at expensive debt and whether it can be reduced or restructured over time. It might mean understanding what insurance cover you have and where the gaps are. It could involve identifying expenses that are likely to arise over the next six or twelve months so they are less likely to become surprises. Or it might simply mean having a clearer plan for what you would do if an unexpected expense occurred.
None of those things replaces an emergency fund. But they can still make your financial position more resilient.
Your emergency fund is only one part of the picture
Cash savings are one way of protecting yourself against financial shocks, but they are not the only consideration. A broader financial plan looks at how different parts of your finances work together.
For example, someone with a secure income, manageable debt and good insurance cover may have different needs from someone who is self employed and experiences significant fluctuations in income. A household relying on one income may need to think differently from a household with two. Someone approaching retirement may need more readily available cash because replacing lost income becomes more difficult.
The right level of emergency savings therefore depends on much more than a rule of thumb. It depends on your circumstances.
What if you have investments, but very little cash?
There is another situation that can sometimes be overlooked. A person may have KiwiSaver, managed investments, shares or property and still have very little money available at short notice. On paper, they may be building wealth. But if an unexpected expense means they have to borrow money or sell an investment at an unsuitable time, they may still be financially vulnerable.
That is why liquidity, or having access to money when you need it, matters within a financial plan. It does not necessarily mean keeping large amounts of money sitting in cash. It means considering how much needs to be readily available, what money is intended for longer term goals, and what would happen if a large expense arrived unexpectedly.
For people who are investing or preparing for retirement, this can be just as important as deciding what to invest in.
When there is some room to start
If your circumstances improve and there is eventually a little money available to put aside, an emergency fund does not need to appear overnight. It can be built gradually.
The first goal might simply be enough to cover one of the expenses that would otherwise cause the most disruption. That could be an insurance excess, a car repair or a particularly large household bill. From there, the buffer can grow as circumstances allow.
The important point is that the target should work with your financial situation, rather than becoming another source of pressure.
Financial planning should reflect real life
Financial planning can sometimes appear to be about having enough money to invest. In reality, it starts much earlier than that. It is about making decisions with the resources you have, understanding the risks you face and trying to put yourself in a stronger position over time.
For some people, that may involve reviewing an established emergency fund and deciding whether it is still appropriate. For others, it may involve building one gradually. And for some, the priority right now may simply be getting through the month and understanding what options are available. All of those are valid starting points.
An emergency fund can provide valuable financial security, but it is only one part of a much bigger picture. Good financial planning starts with that bigger picture, and with your circumstances as they are today.
Wealth
