Emergency funds: How to boost your financial safety net

MAS Head of Investments, Dan Mead, answers common questions about emergency funds, and shares tips on how to grow your rainy day savings. 

Is it true that we should aim to have several months’ salary set aside as an emergency fund? 

Unfortunately, we live in a country where more than half the population couldn’t cover an unexpected expense equivalent to a month’s income. According to Stats NZ, 38.2% of households perceived their income as either ‘not enough’ or ‘only just enough’. This means the sad fact is that many people would be forced to take on debt to cover an emergency. 

Emergencies that catch people off guard include such things as unforeseen car troubles, dental procedures and family health issues. That’s why it’s generally recommended that people save around 3 to 6 months of expenses to cover emergencies. If your household spends $5,000 a month on food, transport, housing, and so on, then you’d want to aim for between $15,000 to $30,000 in savings according to this rule. That said, if you’re one of many who have very little saved, even $1,000 is a good start. 

Emergency funds not only provide financial security but can also enable you to handle risk more effectively. With a robust savings cushion, you may be able to afford to select a higher insurance excess (the amount you pay when you claim) to lower your overall premiums. A financial safety net can also help you navigate investment market fluctuations with greater confidence. Having readily accessible cash can enable you to better manage volatility to take on more investment risk and earn higher expected returns over time. 

Emergency savings should be deposited somewhere accessible and low risk. Appropriate places could be in a higher interest bank account or a cash fund without a term. The MAS Investment Funds Cash Fund could also be an option. It invests in a range of different term deposits with maturities up to 12 months, is diversified across several New Zealand banks, offers no term or lock-in period, and withdrawal requests are generally paid within 5 business days. The Fund is also a portfolio investment entity (PIE), with a maximum prescribed investor rate (PIR) tax rate of 28%. This is particularly attractive when compared to a standard term deposit or bank account which can incur Resident Withholding Tax of up to 39%. 

What are some simple ways to get started? 

If you’re looking for everyday ways to save money and start building your emergency fund, try these simple tips for reducing your current spend without too much pain: 

• Keep track of your outgoings for a month so you can get a clear picture on where you might be spending unnecessarily.  

• Being more energy efficient at home can also help you save. Simple things like switching appliances off at the wall (many use energy on standby), blocking draughts around doors and windows to keep heat in, washing clothes in cold rather than hot water and only running the dishwasher when it’s full, will make a difference. That reduction in your bill can then go into your savings fund. 

• Use your kitchen. Do you get takeaways on autopilot during the week? Making something simple at home could be a saving.  

• Review some of your existing plans and subscriptions. For instance, could you be on a better deal for your phone or internet? Are you paying for a streaming service you’re barely watching or a Substack you’ve stopped reading? Why not pay that money to yourself instead?  

• Be sales savvy. If you know you’ve got a big purchase coming up, like new whiteware or appliances, can you wait until there’s a sale (like Labour Weekend or Cyber Monday) and bank the price difference? 

• Be clever with loyalty points, shop for deals that have good rewards and link your credit card to your Airpoints™ if you know you’ll need to buy flights. 

What is microsaving?  

Microsaving is the practice of putting small amounts of money aside on a regular basis so that you gradually build up savings over time, without doing anything drastic or having to think too hard about it. It works on the principle that small, consistent saving soon becomes a habit, and helps you realise that boosting your savings is achievable – and addictive! With microsaving, no amount is too little. Even a few spare dollars, or the change from a purchase is valuable in helping you grow your overall total. 

How can a financial adviser help me achieve my savings and investment goals? 

A financial adviser can improve your economic outcomes by helping you understand your goals, set a plan and choose the right investments. Even more importantly, the value an adviser can bring is in helping you stick with your plan, through good times and bad.  

Having an expert between you and your money helps ensure you don’t make irrational decisions that could set you back years. This happened to thousands of Kiwis during the Covid-driven market sell-off. According to the Financial Markets Authority (FMA), over 60,000 people switched KiwiSaver funds in March 2020, mainly to lower risk, lower expected return funds. Instead of sticking to their goals, these people let their emotions get the better of them. By the time the market recovered in August that year, over 90% were still in lower risk funds, effectively locking in their losses.  

Don’t become one of these people. As a MAS Member, you have access to a personal MAS Adviser at no additional cost. They’re here for your benefit, so please do your future self a favour and get in touch. 

Once I have some savings, what are the best ways to build up my money? 

Ideally, you want to take a systematic approach to building your wealth, buying assets with reasonable risk in exchange for long-term growth. Here are 5 things to consider when creating your plan: 

1. Understand your investment timeframe. If you’re 40 years old and saving for retirement, you may want to consider a Growth or Aggressive Fund. This type of investment is more volatile in the short term than lower risk funds, but is expected to generate higher returns over the long term. On the other hand, if you’re buying your first home in the next 5 years, a Conservative or Cash Fund may be a better option. 
2. Recognise your risk appetite. The last thing you want is to be constantly worrying about your investments, even if you know you’ve made a sound investment decision. In these situations, it can make sense to talk with a MAS Adviser or decide to trade some potential upside for some actual sleep. 
3. Diversify your investments. If you’re like most Kiwis, your wealth is mainly tied up in your family home or bank deposits. This represents a very concentrated portfolio, so it can be a good idea to spread your bets. Some investments may not produce the returns you desire, while others may succeed beyond your expectations. Diversification helps you balance out the bad with the good to help protect and grow your capital.  
4. Keep up your contributions. It’s important to keep investing, especially if markets fall. This will make your dollars go further as you’re buying more assets than you were previously when valuations were higher. It’s a bit like buying frozen chocolate-coated pineapple pieces on special. You’re still spending $7.99, but now you’re getting 2 packs instead of one. This investment rule is called ‘dollar-cost averaging.’ It helps you offset short-term losses by acquiring long-term assets at temporarily lower prices. 
5. Invest on autopilot. Financial losses tend to affect us much more than gains, which is why many people often lock in losses and sell when everyone else is selling. Conversely, the fear of missing out causes us to want to buy when everyone else is buying, pushing us to get in on the action, even though the party might be about to end. One way to fix this is to take steps to remove your emotions from your investing. For example, you could set up an automatic payment to your investment account on the day you’re paid, only invest what you’re comfortable with, and then forget about it, only reviewing your plan and performance once a year.