Emergency funds: Is yours still fit for purpose?

Money Month is back, and the theme this year is once again emergency funds. Last year we focused on the risks of reaching for yield. This year we ask whether your emergency fund is still big enough to do its job.

Life moves quickly, and so do household costs. With inflation currently at 4.1%, well above the top of the Reserve Bank’s 1–3% target range, an emergency fund that felt more than adequate a couple of years ago may not stretch as far today. Higher rates, insurance premiums, grocery costs and mortgage repayments mean covering three to six months of expenses takes noticeably more today than it did a few years ago. Money Month is a good time to give your emergency fund a check-up.

How much is enough?

The standard rule of thumb still holds up well – three to six months of essential expenses for most people, and closer to twelve months for those with less predictable income or a single-income household. The amount that covers those months, however, has almost certainly gone up. It’s worth working out what your essential expenses really look like today – mortgage or rent, food, power, insurance, transport and the regular bills – rather than relying on a figure you set a few years ago.

Your circumstances matter too. Life changes – perhaps the mortgage is now paid off, the kids have left home, or your income has become more (or less) predictable than it used to be. A young person renting with plenty of job options can comfortably sit at the lower end, while a family with a mortgage, dependents and a single income need a bigger buffer.

For retirees who are no longer earning a regular income, your emergency fund becomes your first line of defence against having to sell growth assets during periods of market stress. A common guideline is to hold around two to three years of essential expenses in cash and short-dated term deposits.

The right home for your emergency fund

Whatever the size of your emergency fund, one thing remains constant – it should be kept in liquid, low-risk investments. Cash or short-term term deposits are ideal. The key is accessibility – being able to get your money quickly when you need it most – and capital preservation.

It’s also worth checking that your emergency fund is held with a licensed deposit taker – balances up to $100,000 are protected by the Depositor Compensation Scheme should the institution fail. All the major New Zealand banks qualify, but it’s worth confirming if your emergency fund sits with a smaller institution or non-bank deposit taker.

Don’t rely on the alternatives

It’s easy to think of a credit card, drawing down on your mortgage or a KiwiSaver hardship withdrawal as a backup plan if things go wrong. In reality, none of these do the job cash does. Credit cards come with interest rates north of 20%, and what starts as a short-term fix can quickly become a long-term debt problem. Drawing down on your mortgage depends on your equity, your lender, and everything being in order with the loan – exactly the things that can change when life throws you a curveball. KiwiSaver hardship withdrawals are slow, hard to qualify for, and only available once you’re already in genuine financial trouble. Cash sitting in an account might be boring, but it’s the one option that works every time.

The hardest part isn’t building it, it’s leaving it alone

Most people who struggle with emergency funds don’t struggle to save the money – they struggle to keep it untouched. Holidays, renovations, or a good deal on something can quietly erode a fund built up over years. The trick is to make it a little harder to dip into – a separate account, away from your day-to-day spending, and an automatic top-up to rebuild the fund after you’ve drawn on it. It also helps to have your own sense of what a genuine emergency looks like.

Purpose over performance

By definition, emergency funds serve a very specific purpose – to be there when you need them. That means the priority must be on safety and liquidity, not return. These funds are not meant to grow wealth or beat inflation. Instead, they’re your financial buffer against life’s unexpected events – a job loss, medical emergency, or major expense.

That’s why it pays to be wary of products offering returns well above term deposit rates. Products like mortgage funds, property syndicates or direct lending products can look attractive from a return perspective, but they often come with hidden risks – illiquidity, credit risk, concentration risk, or simply less transparency around what you’re actually invested in. These risks are inconsistent with the safety and accessibility an emergency fund needs, and they’re not things you want to discover at the moment you actually need the money. When it comes to your emergency fund, simple and boring is exactly the point.

So this Money Month, take a few minutes to give your emergency fund a check-up. Have a look at the size of your fund, where it’s held, and how easy it would be to get to if you needed it. It might be one of the most worthwhile financial reviews you do all year.

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