How big should an emergency fund be in Australia?

An emergency fund is money you set aside for the bills you did not see coming. A car repair, a broken fridge, a sudden trip to see family, or a few weeks without pay. Without one, those costs tend to land on a credit card or a loan, and the stress lasts longer than the event.

The hard part is knowing how much is enough. Too little and it runs out in the first month. Too much and you may be holding cash you could be using for other goals. This guide walks through a practical way to set a target that fits your life.

What an emergency fund is for

ASIC’s Moneysmart describes an emergency fund as a financial safety net “so you don’t have to borrow money if something happens to you or your family.”

That definition does a lot of work. An emergency fund is for events that are:

• Unexpected. You did not know about them a month ago.
• Necessary. Ignoring them would cause real harm, like losing your job because your car is off the road.
• Urgent. They need paying now, not in a few months.

Moneysmart puts it simply: keep your emergency fund “for expenses you need to pay quickly when other money isn’t available.”

What it is not for

A lot of costs feel like emergencies but are predictable. Car registration, insurance renewals, school fees, Christmas and annual subscriptions all arrive on a schedule. These are better handled with their own savings goals or a sinking fund, so the emergency money stays untouched.

Moneysmart makes the same point. If an expense can wait, it suggests saving up for a few weeks and paying for it from that money instead.

What Moneysmart suggests as a target

Moneysmart’s guidance is: “A good target is to have enough in your emergency fund to cover three months of expenses.”

It also adds a longer view. “If you’re thinking long term, it’s worth having a bit more put aside.” It gives the example of taking time off work to care for a family member.

So three months is a sensible starting point, and many people choose to aim higher once they reach it. The right number for you depends on the factors covered below.

How to calculate your number

The key word is expenses, and in particular essential ones. In a real emergency, especially a loss of income, most people cut back hard. You stop eating out, pause subscriptions and delay big purchases. What remains are the costs you cannot easily avoid.

Moneysmart suggests working out your monthly expenses, then multiplying by the number of months you would like to cover. Here is one way to do it:

1. Look back over two or three months of bank statements.
2. List only the costs you would still need to pay if your income stopped.
3. Add them up to get a monthly figure.
4. Multiply by the number of months you want to cover.

A worked example

Alex is a fictional renter living alone. Here are Alex’s essential monthly costs.

Essential expense	Monthly amount
Rent	$1,900
Groceries	$700
Electricity, gas and water	$250
Transport and fuel	$300
Insurance premiums	$200
Phone and internet	$100
Minimum debt repayments	$250
Medical and pharmacy	$100
Total essentials	$3,800

Using Moneysmart’s three month target, Alex’s goal is $3,800 multiplied by 3, which is $11,400. If Alex wanted a larger buffer of six months, the goal would be $22,800.

Notice what is missing from the table. Streaming services, takeaway, gym fees and holidays are left out. They matter in normal life, but they are the first things most people pause in a crisis.

Factors that change the size

Two people with identical expenses can need very different buffers. These are the main things to weigh.

How secure your income is

If you work in a stable role with long tenure, you may feel comfortable near the lower end. If your industry is seasonal, your contract is short, or you are on casual hours, a larger fund gives you more time to find new work.

It also helps to know your minimum entitlements if your job ends. The Fair Work Ombudsman sets out minimum notice periods under the National Employment Standards. They range from 1 week for 1 year of service or less, up to 4 weeks for more than 5 years. Employees over 45 who have completed at least 2 years of service get an extra week.

Redundancy pay can also help, but it is not guaranteed. Fair Work notes that most small business employers don’t have to pay redundancy pay under the National Employment Standards. If you work for a small business, it is worth planning as if that money will not arrive.

Dependants

Children, a partner who is not working, or a parent you support all raise your essential costs. They also make it harder to cut back quickly. Many households with dependants aim above the three month mark.

Single or dual income

A household with two incomes has some built-in protection. If one person loses work, the other income still covers part of the costs. A single-income household, or someone living alone, carries the whole risk on one pay packet and may want a bigger cushion.

Renting or owning

Renters may need to cover a bond and moving costs at short notice. Homeowners face repairs that cannot wait, like a burst hot water system or a leaking roof. Both are good reasons to include a realistic buffer for housing surprises.

Insurance excesses

Insurance covers big losses, but you usually pay an excess first. Check the excess on your car, home, contents and health cover. Many people make sure their fund could cover the largest one without stress. Moneysmart also mentions income protection insurance as a way to help cover costs if you are unable to work.

Self-employed or irregular income

If you are self-employed, a freelancer or a contractor, there is no notice period or redundancy pay. Income can also swing from month to month. Many people in this position keep a larger fund, and some keep a separate amount set aside for tax so that it never gets mixed in with emergency money.

Government support

Services Australia offers JobSeeker Payment for people looking for work, or who are sick or injured and cannot do their usual work for a short time. Support may not start straight away. If you have savings, a liquid assets waiting period can apply, which Services Australia says “is between one and 13 weeks.” Your emergency fund may need to bridge that gap.

Where people commonly keep it

The best place for an emergency fund balances three things: you can reach it quickly, it is separate from your spending money, and it is safe.

Moneysmart suggests setting up a separate, high-interest savings account, because a separate account means “you’re less tempted to dip into it for everyday expenses.” Look for features that suit the job, such as at-call access, no fees, and no long notice period before you can withdraw.

If you have a home loan, Moneysmart notes you can use an offset account as your emergency fund. The money lowers your home loan interest and you can still access it quickly. Some people prefer a separate account anyway, so the balance is clearly labelled and harder to spend.

Keep in mind that the value of shares and other market investments can fall, including at the moment you need the money.

Deposit protection

Deposits with Australian banks, credit unions and building societies are covered by the Financial Claims Scheme. According to APRA, it protects “deposits up to $250,000 per account holder per ADI,” and aims to return deposits within seven days of the scheme being activated.

Interest is taxable

Interest your emergency fund earns counts as income. The ATO says “Interest from a bank or other financial institution is part of your assessable income for the income year.” Banks report the interest they pay to the ATO, so it needs to be included in your tax return.

How to build it gradually

Three months of expenses can look like a big number. You do not need to get there in one go.

• Start with a small first goal. A starter buffer of $1,000 covers many common surprises. Moneysmart notes that putting $20 a week into savings gives you over $1,000 in a year.
• Automate it. Moneysmart suggests an automatic transfer from the account your wage is paid into, or asking payroll to send part of your pay straight to the savings account.
• Use windfalls. A tax refund, a bonus or a gift can give your balance a sizeable lift.
• Raise the amount over time. Each time you get a pay rise or finish paying off a debt, redirect some of that money to the fund.

Progress matters more than speed. A fund that grows steadily is far more useful than a perfect plan you never start.

When to use it and how to refill it

When a genuine emergency arrives, use the fund. That is what it is for. Using it means it worked, not that you failed.

Afterwards, make refilling it the next priority. Moneysmart gives the example of Eva, who used $1,000 from her fund when her car broke down and kept her automatic transfer running so the balance would start topping up from her next payday.

It also helps to review your target once a year, or whenever your life changes. A new rent, a new baby or a move to self-employment can all shift your essential expenses.

Getting help

If your expenses already exceed your income, or debt makes saving feel impossible, you do not have to work it out alone. The National Debt Helpline offers free, confidential financial counselling on 1800 007 007. A licensed financial adviser can also help with your wider situation.

If you want to track progress, Finsplore, opening to early access on 3 November, will let you set goals, including an emergency fund, and follow them using statements you import or things like your home or super that you add yourself.