How much do I need in my emergency fund?
By Robert Wright /August 26,2021/
In these uncertain times, it pays to have money set aside to give you peace of mind that if your income drops, you still have ample funds to pay for your everyday expenses until you get back on your feet again.
A good rule of thumb is to have enough money for three months of expenses in your emergency account. The amount you set aside, however, will depend on your circumstances.
The Henderson Poverty Line, the amount of money you need to get by each week, including how much you need to keep a roof over your head, is a good place to start to figure out how much you need to cover the basics in the event of an emergency. This is a benchmark that was first developed in 1973, which is now widely considered to be the benchmark for the disposable income Australians need to support themselves. Its figures show:
- Single people need $542.92 a week
- Couples need $726.27 a week
- A family of four needs $1019.70 a week
These figures are a guide only, and your expenses are likely to be higher, so it’s worth looking at your actual expenses to figure out how much to set aside. You can do this by:
- Figuring out the amount of money you have spent by reviewing your transactions in online banking across a three-month period.
- Dividing up costs into buckets like food, rent or mortgage payments, other loan repayments, transport and car costs, health and insurance premiums and energy and phone bills.
Once you know how much you’ve spent on these basic expenses you can work out how much you need to save in your emergency fund. It’s a good idea to add a contingency amount over and above this amount in case other expenses arise.
Now you’ve figured out how much to save in your emergency fund, it’s time to decide where to store these funds. Here are some options:
- Mortgage offset account or redraw facility: storing your emergency funds in an account linked to your mortgage helps reduce the interest you pay and the time it will take to pay off your mortgage.
- High interest savings account: this is an option if you rent and can help to add to your emergency funds over time as you will earn interest on the money. Look for an account that pays extra interest if you don’t make withdrawals.
When to access your money
Once you’ve saved up your emergency money, it’s useful to put in place some guidelines about when to spend it. This is important as everyone has different ideas about what constitutes an emergency, depending on their views, as well as their level of wealth. Here are some ideas:
- If you lose your job and need funds to pay for your mortgage or rent.
- If you suffer a health emergency or need urgent dental work and need money to pay for treatment.
- If your car needs urgent repairs that are not covered by car insurance.
- If a family member falls ill or suffers an accident and you need to take time off work to look after them.
If you decide to dip into your emergency savings for one of these or another reason, the idea is to spend the money on daily living expenses like food and bills. Emergency money isn’t usually for play money or for entertainment purposes. You can always set aside another pot of money for this purpose.
Emergency funds are a great way to give you a sense of financial confidence and the sense you will be able to meet your obligations through life’s ups and downs.
Withdrawing Super: what to consider
By Robert Wright /May 08,2020/
The federal government has been releasing details of financial support available to Australians who have lost income due the economic impact of the COVID-19 pandemic.
A huge number of us have been affected in some way and many have been left feeling stressed and confused about what to do to keep afloat.
Although concern about money isn’t the only problem we’re grappling with, financial stress is likely to be on the rise, even among those of us who are generally pretty good at staying on top of our finances.
A sudden and unexpected loss of income can send anyone into a panic and many will be looking for ways to replace that income to stop them from racking up debts or running out of savings in a matter of weeks.
Who can withdraw super and how much can I get?
One option Australians in need may be looking at is applying for early access to their super savings.
Here’s a quick summary of some of the more important details of this temporary measure to ease financial hardship:
- Eligible Australians will be able to access up to $20,000 from their super fund or funds.
- If you meet the financial hardship criteria, you can apply for $10,000 before 30 June 2020 and a further $10,000 after 1 July 2020.
- Early withdrawal is available to people who are unemployed, have had their working hours/business income reduced by 20% since 1 January 2020, or are receiving Centrelink payments.
A payment of $10,000 or even $20,000 is a very welcome injection of cash at a time when you may be struggling to cover basic costs like your rent, groceries and utility bills. However, it’s really important to remember that these super savings have the potential to make a significant difference to your level of income in retirement.
If you dip into your super now, you could find yourself lagging behind in having the savings you need to live comfortably when you’ve stopped work for good.
“The ramifications of accessing super early could be really significant,” says Ben Marshan, Head of Policy and Standards at the Financial Planning Association of Australia (FPA).
“Conservatively, every $1000 that you have in super at age 30 will be worth about $4500 at age 60. If you take $1000 out now, you have to put in $4500 over the next 30 years to get back to the same position. Financially, for a lot of people that can be a massive struggle and they’ll never actually catch up.”
Multiply that $1,000 by 10 or 20 and you can start to see what you could be sacrificing from your retirement nest egg by making a substantial withdrawal now. And this is why it’s so important to get expert advice before making a decision, as well as exploring other options.
“Consider getting professional financial help to understand the implications for yourself, Marshan advises. “Accessing your super early should only ever be a last resort.”
What are my other options?
If you already have a financial planner, it’s definitely worth reaching out to them at this time to talk about whether you should be using your super as a temporary income boost.
Seeking advice is particularly important if you are told by any service provider that you have no other option but to access your super.
The financial services regulator ASIC has recently taken steps to caution landlords and property agents against suggesting that tenants should be accessing super to keep paying their rent.
Making such a suggestion could be seen as giving financial advice, and real estate agents are neither qualified or licensed to provide such advice.
Source: Money & Life
The ups and downs of superannuation
By Robert Wright /September 02,2019/
Many of us like to keep an eye on our superannuation balance. It’s only natural, as we all want to retire in relative comfort, and for many people super is their second largest asset, after their family home.
If you’ve been checking your super over the last few months you might have noticed your balance going up and down. The first thing to know is this is quite normal. Share markets around the world naturally go through phases of volatility – where the value goes up and down. If your super is invested in growth assets, like Australian or international shares or property, there is going to be a bit more fluctuation in the short term than you would expect with defensive assets, like cash or bonds. But there could also be the reward of higher returns in the medium to long term.
The amount of fluctuation you experience depends on where your super is invested. In fact, your balance changes daily. How it changes depends on all kinds of things, like which option you’re invested in and what asset classes the option invests in. Many things will impact your balance. The thing to keep in mind is that a dip in your superannuation balance is normal, as is a rise. You will also see the impact of your contributions going in and the fees for your fund coming out. It is not static!
What should I do?
Just remember your super is designed to be a long term investment – for when you retire. This means reacting over short term changes could see your retirement balance negatively impacted in the long term. Here’s some quick tips you can consider:
- Keep calm
- Do you know where your money is invested?
- Decide how you’ll invest in super
- How comfortable are you with risk?
- Have a plan
- Get help
Super balances go up and down. Well, it is a long term investment after all and there will be fluctuations from time to time. Reacting to short term market changes before speaking to a financial adviser or understanding how it could impact you, could mean missing out if it goes back up down the track. Trying to pick the time to make a change is hard for many investors.
Do you know where your money is invested?
Some options might be invested in riskier (more volatile) assets (such as shares and property) vs lower risk assets (such as cash and fixed interest). When you understand where your money is invested, you’ll better understand fluctuations.
Decide how you’ll invest your super
Don’t forget, you can take your super any direction you want. As our Head of Wealth, Cathy Duncan, suggests: “If you want to be a bit more hands on and are confident to make some of your own decisions, consider things like when you want to retire and your current financial situation, and ask your super fund about investing in things that mean something to you. Create your own portfolio but make sure you do your research first”. By doing this you could create diversity in your portfolio, which may help reduce your risk. If you are not confident with these matters, you should get financial advice before making any changes to your portfolio.
How comfortable are you with risk?
Generally speaking, the higher the risk, the greater the opportunity for high returns over time. If seeing your balance go up and down regularly concerns you, you may want to look at your investment options and your level of risk. Knowing this can help set your expectations. You also need to consider how long you are investing for – your retirement may be 25 or 30 years away so some short term ups and downs for a longer term reward might be something you can live with. You can also look to diversify your super investments further which may help reduce volatility.
Have a plan
As we mentioned earlier, super is a long term investment so having a plan about how much you want to retire with, and what steps you need to take to get there, helps you track your superannuation balance over the long term.
Source: ING, May 2019
Make Australia save again
By Robert Wright /September 02,2019/
Are you one of the 20 per cent of Australians with less than $250 in their savings account?
Recent research from AMP Bank has found that one in five Australians isn’t saving any of their monthly income.
And we’re all different when it comes to saving. People in Tasmania and Western Australia have the least amount of savings, while men on average have nearly 20 per cent more money saved than women. Unsurprisingly, young people (those aged 18 to 24 years old) have the lowest savings balances with nearly a third having less than $250 in a savings account.
Why are we saving so little?
With low wage growth and the cost of living increasing, it seems Australians’ savings habits are changing. AMP Bank’s research found that people’s wages are mostly used for everyday living costs and bills, while other costs such as school and day care fees were also called out as factors preventing people from saving.
Another reason people aren’t saving is that they’re actually paying down debts, such as their home loan, faster, due to our record low interest rates.
But we need to save to make sure our financial wellbeing is taken care of. As AMP Bank CEO Sally Bruce points out, “For most Australians, having a pot of money to use when times are tough or to fund the nicer things in life such as a new home or a holiday can have a huge impact on health and morale as well as your wallet.”
Saving for holidays and rainy days
Saving is an important part of our finances. It gives us a safety net when we need it or allows us to have enough money to afford the big things.
According to the moneysmart website, the top three savings goals of Australians are:
- Holidays. Whether close to home or on the other side of the world, a holiday is what a record 53% of people indicated they are saving for.
- Rainy day fund. 46% of people nominated a rainy day fund, or emergency fund, as their top priority for savings.
- Buy or renovate a home. The dream of owning property is still a goal for most Australians, with 40% of people saving to buy a home or renovate.
So what steps can we take to start saving?
- Find the right savings account to suit your needs. There are many different savings accounts available to you. Online savings accounts and term deposits could offer higher interest rates than a typical transactional account.
- Set a savings goal. Identifying your savings goal is the first step in creating good financial habits, plus you’ll know exactly how much you need and when you need it by so you can commit to reaching your goal.
- Work out where the money will come from. For most people, this might be the money left over from their pay after they’ve covered all their bills and expenses each month. You could also think about getting a side gig for extra income, or cutting back on spending to free up more money.
- Set up a regular savings plan. Once you’ve identified your savings goals, you’ll need to work out the best method of saving for you. The way you save might differ depending on whether your saving goals are long term or short term. For example, a separate savings account where your money is readily accessible might be useful for a short-term goal. A term deposit, where your money is tied up for a set period of time in return for higher interest, might be more suitable for a longer-term goal.
Make sure you’re getting the most out of your savings account
According to the research, more than a quarter (26%) of Australians currently don’t have a savings account. Of those who do, nearly half (43%) don’t know their interest rate.
As Ms Bruce explains, “The more we can encourage Australians to take an interest in interest, the more they will be able to grow their wealth and reduce the impact of unexpected costs or afford the extra things in life they want.”
So, when looking for a savings account, some important features to consider are:
- Does it offer attractive interest rates?
- What fees might I be charged?
- How do I access my money?
- Is there a minimum or maximum amount of funds allowed in the account?
- Will my savings be secure with the financial institution I choose?
- Read more about choosing the right savings account for you.
Saving is an important part of your financial success. Making small changes to build that safety net could help to improve your financial situation.
Source: AMP, June 2019