'Zero stress': Why putting aside money for a rainy day is a good idea

How long could you live on your current savings if you stopped earning an income? According to financial experts, the answer should be three to six months.

Financial advisor and author Martin Hawes says the amount he suggests people save depends on their risks and spending habits.  

For some, saving three months' pay will be enough. For others - including those working in industries with greater exposure to COVID-19 - six months of savings is prudent.

"As a rule-of-thumb, someone spending $50,000 per year should have around $12,500 to $25,000 saved in cash," Hawes said.

Moneyhub founder Chris Walsh said in an environment of uncertainty, cash is king. Having spare cash for emergencies means "zero stress". As a ballpark, he suggests saving three months' income after tax. 

"A rainy day fund is an essential must-have to draw on for emergencies and avoids having to rush to apply for loans, miss credit card repayments or go into overdraft.

"You'll save on fees, high-interest charges and a lot of stress," Walsh said.

Savings can be put into an interest-bearing, everyday bank account or a term deposit. For homeowners who have a revolving credit mortgage, another option is to simply withdraw the money when needed. However this requires discipline not to overspend, and increases interest costs.

"Term deposits with a credit-worthy New Zealand bank (currently paying up to 2 percent per annum) are arguably the safest investment," Walsh added.

Before choosing where to stow their rainy day savings, the first question savers should ask themselves is: 'What level of risk am I comfortable with', followed by 'Do I understand what I'm investing in'?

The purpose of a rainy day fund is to pay for needs, not wants. For someone earning $60,000 per year, a good-sized rainy day fund would be around $12,000. Budgeting $100 per week, it would take two years to save.

"It's not a savings account for holidays or new clothes - it's for medical or dental costs, car repairs, home repairs or anything else that is essential to life."