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Why a savings account may not be the best place for your emergency fund

Money and woman with umbrella in rain
Got an emergency fund? Here’s how to make it work harder. (Source: Getty)

Having an emergency fund to dip into in the case of a leaky roof, sporting injury or some other disaster is a great way to protect yourself and your finances.

However, in a time of massive mortgage repayments, skyrocketing rent and the high cost of living, it can be challenging to get this money together. In fact, according to Canstar research, more than a third of Australians don’t have an emergency fund.

Plus, with interest rates on savings accounts historically low - albeit starting to rise - you might be wondering if there are better options for putting together an emergency fund.

For mortgage holders, Canstar’s group executive, financial services Steve Mickenbecker, said a good option was to put your emergency fund savings towards additional payments for your home loan or in an offset account.

“The average home loan rates are about 3.23 per cent. You can't get anywhere near that as a savings rate - you can get around 1 per cent if you're lucky,” Mickenbecker said.

Using this strategy, mortgage holders can knock down their loan principal faster, pay less interest and get their money back if they need it via a redraw or dipping into their offset accounts, if they have one.

“So it’s a good place to put your emergency funds,” Mickenbecker said.

If you plan to rely on redraws to access your emergency funds, you’ll be putting extra payments towards your loan to chip away at the balance faster.

You can then access these funds via a redraw, if you need them.

An offset account works a little differently. Instead of paying back the loan directly, contributions to an offset account don’t bring down the balance of the loan but work to reduce the amount of interest you end up paying on your loan.

Mickenbecker said offset accounts were slightly simpler to withdraw money from because they were completely separate accounts.

Millions of Aussies don’t have an emergency fund

According to Canstar research, more than a third of Australians don’t have an emergency fund.

For the 61 per cent of people who do have rainy day savings, the average amount set aside for disasters is $8,052.

That’s enough to cover 15 weeks’ rent, based on the national median house rental rate of $508 per week, or around three months of home loan repayments, based on a typical $500,000 mortgage.

Canstar offered a couple of extra tips for saving an emergency fund.

  • Automate it: Set up automatic payments into your emergency fund to make sure money always goes out

  • Use a round-up feature: These work by rounding up any debit card purchases you make - often to the nearest dollar - with the difference being transferred to your savings account

  • Bank your lump sums: Put your tax return or bonus straight towards your emergency fund

  • Choose a competitive savings account: Savers are already seeing more competitive offers now that interest rates are rising, so it pays to shop around

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