How much should an emergency fund be?

What it is for

An emergency fund stops an unexpected expense becoming debt at 20% interest. That framing tells you what qualifies: the car, the dentist, the excess after an accident, the gap between one job and the next. A holiday you knew was coming is a goal, and belongs somewhere else.

Sizing it

Start from essential expenses, not total spending. In a real emergency, discretionary spending stops immediately. What does not:

• Rent or mortgage repayments
• Utilities and internet
• Groceries
• Transport to work
• Insurance premiums
• Minimum debt repayments
• Childcare
• Medical costs

For most households that is well under total monthly spending, which makes the target smaller than it first looks.

Then adjust for income security:

Check what leave entitlements you actually have. Permanent employees accrue sick and annual leave; casual employees generally do not, which is exactly why the range is wider for casual work.

The savings goal calculator turns whatever number you land on into a monthly amount and a date.

Build it in stages

1. $1,000, or one month of essentials. Covers a large share of what otherwise goes on a card.
2. One full month.
3. Three months.
4. Your full target.

Each stage genuinely reduces risk. Stopping at stage two for a while is a reasonable decision.

Where to keep it

If you have a mortgage: the offset account. Money in offset reduces the interest charged on your loan, and that benefit is not taxable income. For most mortgage holders it beats any savings rate after tax, and the money remains fully accessible. See types of savings account.

If you do not: an accessible savings account. With one specific caution.

Not in a term deposit, and not in shares or an ETF. Emergencies do not wait for a maturity date or a good market.

Check the institution is an ADI and understand the Financial Claims Scheme if you hold a large balance.

Debt first, or fund first?

Both, in sequence. Holding $8,000 in savings at 5% while carrying $4,000 on a card at 20% costs you the difference every month, so on the arithmetic the debt goes first.

But clearing every dollar with no buffer means the next unexpected expense goes straight back on the card. The practical order:

1. Build a starter fund — around $1,000, or one month of essentials.
2. Clear the expensive debt. The debt payoff calculator shows which order costs least.
3. Then build the fund to its full target.

If you are already behind

Free financial counselling is available through the National Debt Helpline. It costs nothing and is independent. Building savings while missing repayments is the wrong order — get advice first.