One thing we focus on at Crown is the importance of an emergency fund. The first step toward financial peace of mind for ALL our clients, is to build up your redraw to a point that you have three months worth of living expenses and interest payments. This is no easy feat, but with some discipline and focus it is very achievable.
The following is not breaking news: You will have financial emergencies. They could be big, but hopefully they are small – although the small emergencies can turn into bigger ones if you haven’t mastered the art of building up your redraw and savings.
The statistics are scary, 27% of Australians have less than $1,000 in savings!
The problem is our general lack of surplus income (savings). This is the difference between what we’re paid and what we spend. We can create surplus by reducing our spending or increasing our income (see overleaf for some suggestions). If a person doesn’t have $1,000 to their name, it generally means they never had surplus income to save and never knew about or cared about creating savings.
If we know financial emergencies are going to happen, without exception, we should have a plan for them. That’s the problem. We don’t plan for them, making the average person extremely vulnerable to financial Emergencies. Take, for instance, an unexpected car repair. According to statistics, 62% of Aussies wouldn’t be able to make ends meet to fund the necessary emergency expenditure.
If you live paycheck to paycheck and an unexpected $1,000 expense comes to say hello, it’s not as though most people could cut spending by $1,000 in the moment. That’s why the unprepared borrow on credit cards.
If the borrower isn’t prepared to pay back the money he borrows, then he becomes the unprepared borrower at 16%. Not to get overly dramatic here, but being an unprepared borrower is stage one of a financial quicksand – you really don’t want that!
If you’re forced to borrow in order to fund your financial emergency, be sure to have an aggressive plan to get back out of debt. The process should look like this — emergency, grab money from savings/redraw if available, borrow money for emergency while creating a plan to pay off the debt in a specific period of time, then pay off the debt.
If you borrow money you must have a plan to build your savings balance back up after the emergency.
If you’re able to be smart in the face of an emergency, you do have the opportunity to turn a financial emergency into the catalyst for financial stability. Upon facing an emergency and being forced to find and create surplus to fund it, you will have developed the ability to find and create savings. Jackpot! This new found skill will serve you brilliantly for the rest of your life.
If you don’t leverage your emergency to create stability, you’re going to find yourself in deeper and deeper trouble. It’s all too often that this lack of understanding around emergency expense planning and surplus creation are two of the primary reasons people never turn their financial lives around.
So don’t blame anyone when an emergency shows its ugly face. Just be prepared. It’s coming.