Why you need a freedom fund

Have you heard the phrase ‘freedom fund’?

If you follow personal finance blogs and podcasts, you might see this phrase coming up more and more often. 

So, what is a freedom fund? Why should you have one? And how can you start your own?

What is a freedom fund?

A freedom fund is a savings nest-egg which gives you choices.

Sometimes, you might hear it called an emergency fund. But we think it’s more than that – it’s a safety net to help you enjoy life more, or simply help you get through tough times more easily.

Life often throws curveballs.

Even the most prepared, most organised, financially savvy people can be surprised by the unexpected.

A freedom fund is designed to help you out by providing you with money you can access right away, for whatever you want, which really cuts stress.

You could use your freedom fund for:

  • An urgent car repair. A flat tyre or a mechanical breakdown can leave you without transport to your job, or to get to the supermarket.
  • A relationship split. Have you stayed living with someone in a bad relationship because you can’t afford to leave? Your freedom fund could help you start afresh in your own place. Divorces and breakups aren’t cheap. 
  • A redundancy. No industry is entirely ‘safe’ from redundancies these days. They’re hard to predict, and you probably won’t be paid out much – if anything. A freedom fund can help bridge the gap between jobs.
  • A short-notice trip to see friends or family. Sometimes your friends or family might need some extra support. That might be a new baby, an illness, or just going through a tough time. Last-minute trips like for funerals or other emergencies can cost a lot, at a time when you don’t want added stress. A freedom fund can help you solve these crises.
  • An amazing opportunity. This is where a freedom fund might differ from an emergency fund. Emergency funds are just for, well, managing emergencies. But a freedom fund can also be used to help you take up an amazing opportunity. Say, for example, you’ve been head-hunted for an exciting new job in another city. You’ll need money for the move, and you might face break fees for your rental or electricity. A freedom fund means you’ll have spare cash to cover this, so you can say yes to this amazing new job! Or maybe your friends are planning a special trip next year, or there’s a wedding overseas. Your freedom fund could help pay for this, or at least give you a head-start. 

So often we can miss out on things – or even worse, get into debt – because we don’t have the cash around in times of need. A freedom fund gives you the opportunity to say ‘yes’, instead of ‘sorry, I can’t afford this right now’.

Use your freedom fund instead of a credit card or personal loan, and you’ll be better off. 

How do I start a freedom fund?

Start today, even with just a small amount. Find an approach to saving that works for you.

Many people find putting aside small, regular amounts is the best way. You might want to open a savings account with a different bank, so you can’t access it too easily, or be tempted to use the money for something that’s not really any sort of emergency. 

Some banks offer good incentives on savings accounts. You might earn interest, or earn higher amounts of interest if you don’t take any money out each month.

Try to get a fee-free account, because fees really eat into your savings over the long term. Money Hub and Sorted both have good, independent bank comparisons.

You might want to invest your money instead of putting it in a savings account. There are pros and cons to this approach. You might earn higher returns, but sometimes you can’t access your money as easily. For example, term deposits must be invested for a fixed period, from a month to five years or more. If you take it out earlier, you will lose interest and may also be charged ‘break’ fees. Some investment funds have notice periods – from days to months – to withdraw your money, so they can sell your investments and give you the cash. Not ideal if you need to book flights right away. Do your research and see a financial adviser before making any investment decisions. 

How much should I aim for?

It’s a good idea to have a short-term goal, and a long-term one.

If you find saving money difficult, try aiming for $500 first.

Then, aim to build it up to several thousand. That’s when you’ll really see the benefit of your freedom fund, as it can help with big expenses or life changes. 

The key is to get into the habit of saving, and make it as automatic and hassle-free as possible.

Published 14 January 2020

Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. All content is correct at time of publication date. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. Before relying on it, we recommend you speak with an independent financial adviser.