The Rainy Day Fund: Why You Need One and How to Start

Car breaks down. Hot water system dies. Lose your job. End up in hospital. These things happen, and they always seem to happen at the worst possible time.

Most Australians are one unexpected expense away from financial stress. Recent data shows that over a quarter of Aussies have less than a month's income in savings, and one in six has less than $1,000 put aside. When something goes wrong, that often means reaching for credit cards, borrowing from family, or scrambling to figure out how to pay for urgent expenses.

An emergency fund changes that. It is not about being pessimistic or expecting the worst. It is about having breathing room when life inevitably throws something unexpected your way.

What Is an Emergency Fund?

An emergency fund is money you have set aside specifically for urgent, unexpected expenses. It is separate from your everyday spending money, your savings for a holiday, or your house deposit fund. This money has one job: to be there when something goes wrong.

Emergency funds cover things like:

• Unexpected medical or dental costs not covered by insurance
• Urgent car repairs needed to get to work
• Replacing essential appliances that break like a fridge or hot water system
• Covering rent and bills if you lose your job
• Emergency travel to see family
• Veterinary emergencies for pets
• Essential home repairs like burst pipes

Emergency funds do not cover wants or lifestyle expenses. They are not for holidays, upgrading your phone, or buying things on sale. Those are great to save for, but in a separate account with a different purpose.

Why You Actually Need One

The reason emergency funds matter is simple: unexpected expenses do not wait for you to be financially ready.

Without an emergency fund, you have three options when something urgent happens:

1. Put it on a credit card and pay high interest while you work it off. Credit card rates in Australia typically sit around 20% p.a., which means a $2,000 emergency quickly becomes $2,400 or more if you cannot pay it off immediately.
2. Borrow from family or friends, which can strain relationships and comes with its own stress even if no interest is charged.
3. Go without or delay dealing with the problem, which often makes things worse. Ignoring that weird noise your car is making does not make it cheaper to fix later.

With an emergency fund, you handle the situation and move on. You use the money, deal with the emergency, and then rebuild the fund. No debt, no awkward conversations, no compounding problems.

How Much Do You Need?

The standard advice is three to six months of living expenses, but that is not helpful if you are starting from zero and that feels impossible.

Here is a more practical approach:

• Starter goal: $1,000. This covers most common emergencies like minor car repairs, urgent dental work, or replacing a broken appliance. It is achievable and provides meaningful protection.
• Minimum goal: One month of expenses. Calculate your essential monthly costs: rent or mortgage, utilities, groceries, transport, insurance, minimum debt payments. That is your one month target.
• Standard goal: Three months of expenses. This is the baseline recommended amount. It gives you breathing room to handle job loss, extended illness, or multiple emergencies hitting at once.
• Extended goal: Six months of expenses. Consider this if you are self employed, have dependents, have a single income household, work in an unstable industry, or have health issues that might require time off work.

For most Australians, three months of expenses is a solid target. If you are single and your monthly essential expenses are around $2,500, that is $7,500. For a family with a mortgage spending $5,000 per month on essentials, it is $15,000.

These numbers can feel overwhelming. Remember, something is always better than nothing. $500 is better than $0. $1,000 is better than $500. Build it gradually.

Where to Keep Your Emergency Fund

Your emergency fund needs to be easily accessible when you need it quickly, separate from your everyday spending to avoid temptation, and earning some interest so inflation does not erode it.

Best options:

• High interest savings account: A separate savings account with a decent interest rate (currently around 4% to 5% p.a. for competitive accounts). Make sure it allows quick transfers when needed. Look for accounts with minimal conditions to earn bonus interest.
• Offset account: If you have a mortgage with an offset facility, this is ideal. Your emergency money sits there reducing your mortgage interest while remaining instantly accessible.

What to avoid:

• Your everyday transaction account: Too easy to accidentally spend. The money blends with your regular spending and disappears.
• Term deposits or locked accounts: You cannot access the money quickly in an emergency, which defeats the purpose.
• Shares or investments: These fluctuate in value. You do not want to be forced to sell investments at a loss because you need emergency money right now.
• Under your mattress: Inflation eats away at cash, and it is not secure. Use a bank account.

How to Build Your Emergency Fund From Zero

Starting is the hardest part. Once you have made the decision and taken the first step, momentum builds.

1. Open a Separate Account: Set up a dedicated savings account just for emergencies. Many banks let you do this online in minutes. Name it something clear like "Emergency Fund" so you remember its purpose.
2. Start Small and Consistent: Do not try to save $10,000 immediately. Start with what you can actually afford. Even $20 per week adds up to $1,040 per year.
3. Automate It: Set up an automatic transfer from your main account to your emergency fund. Do this right after payday, before you have a chance to spend the money elsewhere.
4. Add Windfalls: When extra money comes in, put some toward your emergency fund. Tax refunds, work bonuses, or cash gifts can give your fund a significant boost.
5. Cut One Thing: Look at your spending and find one subscription, service, or habit you can eliminate or reduce. Redirect that money to your emergency fund.

Common Obstacles and How to Handle Them

"I can barely cover my expenses now, I cannot save anything."Start with $5 or $10 per week. Track your spending for a month and look for small amounts being spent on things you do not actually value. There is almost always something, even if it is tiny.

"I keep dipping into it for non emergencies."Create clear rules for yourself about what counts as an emergency. Write them down. If you are tempted to use the money for something that does not meet your criteria, give yourself a 24 hour cooling off period.

"I built one, then had to use it, now I am back to zero."This is not failure, this is exactly why you built the fund. It protected you from debt. Now rebuild it using the same methods that worked the first time. It will go faster the second time because you have already established the habits.

When to Actually Use It

Be honest about what constitutes a genuine emergency. Different people have different thresholds, but here is a good framework:

Definitely use your emergency fund for:

• Essential repairs needed for work (car) or daily living (hot water, fridge)
• Urgent medical or dental treatment
• Covering essentials if you lose your income
• Unavoidable emergency travel (family illness, funeral)

Do not use your emergency fund for:

• Holidays or entertainment
• Upgrading things that still work
• Sales or bargains on non essentials
• Lifestyle improvements

If you are unsure, ask yourself: "If I do not pay for this right now, will it create a bigger problem or cost more later?" If the answer is no, it is likely not an emergency.

Rebuilding After You Use It

If you need to dip into your emergency fund, do not feel bad about it. That is literally why it exists. But do make rebuilding it a priority.

Assess the damage and make a plan. Can you temporarily increase your contributions until you are back to your target? Can you add a windfall? Restart your automatic transfers immediately, even if the amounts are small. Avoid the trap of thinking "I will rebuild it later." Later never comes.

Emergency Funds and Debt

Should you build an emergency fund or pay off debt first? Both are important, but here is a practical approach:

1. Build a small starter emergency fund ($1,000 to $2,000) first. This prevents new debt when small emergencies hit.
2. Then focus on paying off high interest debt like credit cards aggressively.
3. Once high interest debt is gone, build your full three to six month emergency fund.
4. Then focus on other debt like personal loans or extra mortgage payments.

If you try to do everything at once, you will make slow progress everywhere. Sequence your goals to build momentum.

What About Insurance?

Insurance and emergency funds serve different purposes. Insurance covers big, unlikely events like major illness or home damage. Emergency funds cover smaller, more common expenses and things insurance does not cover, like excess payments or job loss.

You need both. Do not skip insurance thinking your emergency fund will cover everything, and do not skip your emergency fund thinking insurance covers everything.

See Your Emergency Fund Grow in Real Time

One of the hardest parts of building an emergency fund is actually seeing it separate from everything else. When money sits in an account alongside your everyday spending, it is easy to lose track of progress or accidentally dip into it.

WeMoney lets you see all your accounts in one place, including tracking your emergency fund separately from other savings goals. Watch your balance grow with each automatic transfer, see your progress toward your target, and get a clear picture of your complete financial situation.

Whether you are just starting with $20 per week or rebuilding after using your fund, having visibility makes it real and keeps you motivated. Download WeMoney free for iOS and Android.

Disclaimer: This article provides general information only and is not financial advice. WeMoney operates under Australian Credit Licence 526330. For personalised financial guidance, please consult a licensed financial adviser or conduct your own research before making financial decisions.