Importance of an Emergency Fund

How much, where to keep it, how to build it

Most financial problems aren't caused by bad decisions. They're caused by something unexpected hitting when there's no buffer. An emergency fund is that buffer.

What it is

An emergency fund is cash set aside for unplanned expenses — a car repair, a medical bill, a period without income. It sits separate from your everyday spending, and you only touch it when something genuinely unexpected comes up.

The standard target is three to six months of essential expenses. That's not three to six months of your full income — it's three to six months of what you'd actually need to cover rent or mortgage, groceries, utilities, and transport if your income stopped.

How much do you actually need?

Start by looking at your Household Essentials spend in SortMe. That's your monthly floor — the number your emergency fund is designed to protect.

Multiply it by three for a starter fund. Multiply it by six if your income is variable, you're self-employed, or you have dependants. Some people with higher risk — single income households, contract work, health considerations — aim for twelve months.

If three months feels a long way off, start with $1,000. That covers most one-off emergencies and gives you breathing room while you build towards the full target.

Where to keep it

A high-interest savings account, kept separate from your everyday accounts. The separation matters — it removes the temptation to dip into it for non-emergencies, and it means you won't accidentally spend it.

In NZ, most major banks offer savings accounts with no fees and standard interest rates. These usually sit at about 2-3%. It doesn't need to be complicated. It needs to be accessible within a day or two, but not so accessible that you spend it on a long weekend.

There are plenty of other non-bank options too, such as Kernel, Simplicity, or Sharsies. Many of these investment platforms offer the equivalent if not higher interest rate for their cash savings accounts. The trade-off is that it may take an extra day to transfer the funds to your account.

Be mindful of placing your emergency fund in an investment fund or account. Yes there is the opportunity to watch that $1000 grow but be aware that the trajectory of investment funds are dictated by a wide array of economic and societal trends, events and market forces with global geopolitcal reach. Steady growth nor nterest returns are guaranteed.

Don't put your emergency fund into your KiwiSaver. You can only access the savings in this fund when you turn 65 or buy your first home.

How to build it

Use SortMe to find the gap between your income and your essential spending - your surplus. That surplus is where your emergency fund contributions come from. If there isn't a surplus one, that's the more important problem to solve first.

You can create a group and name it Emergency Fund in your Budget and set a 'soft' or group target to allocate an amount of your income to it in your budget.

Or

Create a goal in your Goals feature. The contribution will be added to your Total Budgeted expenses within the total Goal Allocation.

Then just treat it like a bill in your household budget. A fixed automatic transfer each payday — even $50 or $100 — compounds into a real buffer faster than most people expect.

When to get advice

If your income is irregular, you're carrying significant debt, or you're not sure whether to prioritise debt repayment or saving, the answer isn't always obvious. Naked Finance works with SortMe users to map out the right order of operations. Try SortMe free for $1 for 7 days and see what your numbers look like first.

These articles are financial education, not personalised financial advice. For advice specific to your situation, talk to a licensed financial adviser.