An emergency fund is one of the most important pillars of personal finance.
It should be something that everyone squares away even before thinking about investing.
When I realised I didn’t have any posts about emergency funds on my blog, I knew I needed to write one ASAP, so here is my guide to emergency funds.
What Is An Emergency Fund?
An emergency fund is, as its name suggests, a sum of cash that is set aside and reserved strictly for emergencies.
Emergencies are things that you need to attend to and resolve ASAP like fixing your school/work laptop if it’s spoiled or medical treatment.
Emergencies are not things that you would like to do just because you feel like it, ie changing your phone when it’s not spoiled or buying things you don’t need.
Since emergencies are almost always urgent matters, an emergency fund should be liquid and readily available for use in the form of cash.
It shouldn’t be locked up in any investment product that doesn’t allow withdrawal of cash immediately.
Why You Need It
Margin Of Uncertainty
Having an emergency fund allows you to live life with some margin of uncertainty.
Unfortunate events can happen to anyone, anytime.
It may be losing your job, expensive medical treatment for a family member, repair work for your house/car that may be damaged in an accident, or etc.
You don’t know when one might befall you, but I think it’s safe to say that throughout your life, you will encounter such misfortunes a handful of times.
And you don’t want it to be the reason why your life gets turned upside down.
By having an emergency fund ready to be deployed in such situations, you’re able to tide through such emergencies with minimal impact on your livelihood.
Or at least, cushion the impact it has on your life.
You won’t have to go to sleep at night worrying about what might happen or whether you’ll be able to pay for your basic necessities.
Emergency funds will buy you some time to find a solution to the emergency at hand so that your life can return to normal ASAP.
Minimise Financial Stress
Without an emergency fund, any unexpected event that occurs that requires unplanned expenses on your part can derail your financial stability and cause financial stress.
Financial stress can affect your mental health and very often, strains relationships with your loved ones because they are likely to be implicated in some way.
Having an emergency fund helps to avoid or minimise the impact and occurrence of such instances and can lead to a healthier, happier life.
Emergency funds also allow you to take financial risks in life because they serve as a safety net for you to fall back on if things don’t work out.
This could mean quitting your job that you’re unhappy with even if you don’t have another job secured yet.
Or taking a pay cut for a job that you’re passionate about.
Or even starting that business that you’ve been thinking about for the longest time.
All of these actions would undoubtedly disrupt your finances and it wouldn’t be wise to do any of them without having a safety net.
In other words, an emergency fund grants you more autonomy over your life and decisions.
While you hope that you won’t need to tap on your emergency funds, it’s definitely a good idea to have it.
What You Need To Get Started
Before you start going about building up your emergency fund, there are some things you need to have prepared.
First, you’ll need to know what your average monthly expenses are.
If you’ve been tracking your expenses for some time, you should have sufficient data for this.
Otherwise, it’s a good idea to start tracking your expenses so you can stay on top of your finances.
The reason you need to know your monthly expenses is so that you can estimate how much money you need to set aside to last you for x number of months.
This comes into play when you’re deciding how much to set aside for your emergency fund.
When computing your monthly expenses, make sure you include all liabilities on top of your daily expenses.
This means any recurring payments that you have lined up such as insurance and loan payments.
For more tips on tracking expenses, check out this post.
At Least 2 Savings Accounts
I think it’s a good idea to have at least 2 savings accounts before trying to set aside any savings.
This is so that you can very clearly separate monies meant for expenses and savings – 1 account for each.
Strictly speaking, your savings don’t have to be kept in a traditional bank account.
They can be kept in other high-interest vehicles like insurance savings accounts, as long as there is a clear boundary between the money meant for spending and for saving.
How Much You Need
It helps to begin with the end in mind so that you’re working towards a tangible figure rather than an arbitrary sum that isn’t defined.
So before you start building up your emergency fund, it’s good to have a sum in mind of how much you want to set aside.
There are many different recommendations online about how much emergency funds one should have and often ranges from 3 months’ – 1 years’ worth of expenses.
Here are some things you can consider when making an initial decision about how much emergency funds you need.
Since emergency funds serve as a cushion against uncertainty, you need to ask yourself how much uncertainty you can tolerate.
One of the most common scenarios people consider is losing their job because its impact can be quantified by a loss of income.
How many months would you want to be “safe” for if you were to lose your job?
How long do you think it would take for you to secure another source of income?
While other uncertainties like medical emergencies should also be considered, it’s hard to estimate how much to set aside because it varies drastically depending on the nature of the emergency.
Liabilities & Dependents
You should also consider what liabilities and dependents you have if any.
If you have liabilities like monthly recurring payments that need to be made no matter what, you may want to have a larger emergency fund.
Unlike living expenses which you may be able to mitigate, you’re not likely to be able to reduce such liabilities.
Also, if you have dependents, you’ll probably want to have more emergency funds set aside because you’re financially responsible for more people.
If, after considering these factors, you still don’t know how much emergency funds you should have, I’d suggest just picking a figure.
Personally, I think 6 months of expenses is a good amount to work towards in general.
The amount you decide on doesn’t have to be set in stone, and it shouldn’t be – you can adjust how much emergency funds you need along the way if you feel that you need a larger or smaller sum.
Assess Your Starting Point
Now that you have an idea of how much emergency funds you’re looking to set aside, you should assess your current financial situation.
How much savings do you currently have?
Are your savings already earmarked for future expenses (ie tuition fees, wedding, housing)?
How much do you spend on average?
How much money are you earning from your salary/receiving as an allowance?
You don’t want your emergency funds to be the same stash of savings that you’re planning to spend in a few years’ time because then, your emergency funds would cease to exist.
So your emergency funds and savings for future expenses should be separate.
You also want to make sure that you’re not spending more than you’re earning/receiving, otherwise, your savings will be depleted eventually.
If this is the case, then you need to either reduce your expenses, increase your income, or both, in order to save money.
Look through your monthly expenses and find things that you’re able to cut out or reduce.
Pick up a side hustle or a part-time job that you’re able to cope with.
Whatever you have to do to make your expenses lower than your income, do it – but make sure it’s sustainable so that you’ll be able to maintain it.
After assessing your finances, you’ll have an idea of how much work you have ahead of you.
If you have enough savings to set aside for your emergency fund off the bat, congratulations – you can focus on working towards other short- and long-term savings goals.
Set Progressive Goals
When you’re starting to set aside money for your emergency fund, I think it really helps to set progressive goals.
Rather than aiming straight for your target amount, whatever that may be, setting smaller milestones along the way can be encouraging and motivate you to keep up the good work.
You can set goals in small increments from your current savings amount, making each goal progressively higher, until you finally reach your targetted sum.
For example, say I’m starting with a savings of $1000 and am working towards an emergency fund of $5000.
My savings goals would be something like $1500, $2300, $3500, $5000.
By breaking down savings goals into smaller sums, it appears to become more achievable and we’re more motivated to reach them.
Pay Yourself First
The key to making sure that you’re always saving money is to always pay yourself first.
That is, whenever you receive money, set aside a portion of it first as savings.
Then, make do with the rest of it for other purposes.
This should apply to all money that you receive, whether it’s from your salary, allowance, CNY angbao, or etc.
For your salary/allowance, the minimum you should aim to set aside for savings is 10%.
Personally, I’d prefer it to be ~20%, and if you can set aside even more than that, good for you.
But everyone’s situation is different and only you’d know how much you can realistically aim to set aside every month.
This refers to money that you receive outside of your regular source of income.
This can be angbaos from Chinese New Year or your birthday, GST vouchers, IPPT rewards, and etc.
From these monies, you should aim to set aside a significantly higher portion of it for savings.
I’d recommend setting aside half of it for savings and spending the other half.
The reason a larger portion of this is set aside for savings is that this is not money you typically rely on for your daily expenses, unlike your salary or allowance.
So you should be able to afford to set aside half of it for savings.
At the same time, I think it’s important not to get too caught up with the idea of only saving money, so you can use the other half to treat yourself or your loved ones.
By making sure you always pay yourself first, you’ll eventually reach your savings goal for your emergency fund.
If you find your savings rate too low, then you can work on trying to be more frugal and reducing expenses, finding ways to increase your income, or both.
Sell What You Don’t Need
If you want to jumpstart your savings, you can consider purging your belongings.
Look for things that you don’t use and don’t need anymore, but are still in reasonably good condition that people might be willing to buy.
This could be school notes, textbooks, games, electronics, clothes and etc.
All you need to do is snap some photos and list them on Carousell or any other appropriate platform.
Where To Keep It
From savings accounts to insurance savings plans to cash management accounts, there are many places you can choose to stash your emergency fund.
To make this decision, there are 3 key considerations: liquidity, capital preservation, and interest rate.
As mentioned earlier, your emergency fund should be highly liquid so that you can withdraw it ASAP when you need it.
So wherever you choose to park these funds, the withdrawal process should take no more than hours.
Traditional bank accounts have the highest liquidity.
Insurance savings plans are right behind, with withdrawal processes taking only minutes.
Cash management accounts are the most illiquid, where withdrawal of funds can take days.
Since you’re going to rely on these funds in times of emergencies, you want to make sure that the money you set aside is going to be safe.
If your capital is depleted, the sum you set aside may not be sufficient when you need it.
Preferably, you should keep your emergency funds in an account that is SDIC insured.
This guarantees that your funds of up to S$75k will be safe if anything happens to the financial entity that’s holding your money.
Bank accounts and most insurance savings plans are SDIC insured, while cash management accounts are not.
Preserving your capital doesn’t only mean making sure that your money is going to be safe, but also maintaining its value.
Cash has less value next year than it has today because of inflation.
By depositing your cash in an account with high interest rates, you can combat the loss of value of your cash from inflation.
Currently, bank accounts offer interest rates of well below 1% while insurance savings plans and cash management accounts offer interest rates of 1%+.
Taking all of these factors into consideration, I’d recommend either a high-interest savings account or a high-interest insurance savings plan.
The former includes the DBS Multiplier and Standard Chartered Jumpstart accounts with interest rates of ~0.4%.
The latter includes Singtel Dash PET and Singlife with interest rates of 1.5% and 1% respectively.
I wouldn’t recommend cash management accounts like Syfe Cash+ or StashAway Simple because they are not SDIC insured and have poorer liquidity.
Emergency Funds VS Savings
What if you’re in the midst of saving up for a large expense like a wedding, but don’t have an emergency fund set aside yet?
Should you focus on 1 first, or work towards both simultaneously?
I think it comes down to personal preference.
Obviously, focusing on 1 at a time means you’ll reach 1 savings goal earlier at the expense of the other.
Meanwhile, splitting up your savings into 2 pots means you’ll take longer to fulfil either one.
Personally, I prefer to focus on 1 thing at a time, and I’d choose to get my emergency fund ready first.
This will make me better prepared to deal with any uncertainties that may come my way while I move on to other savings goals in future.
But again, this is a personal preference.
If you’re on a tight timeline to save up for a big, looming expense, it may make more sense to focus on your savings goal first.
An emergency fund is one of the first things everyone should work towards achieving when it comes to personal finance.
It allows us to live with a margin of uncertainty in life knowing that we are financially prepared for an emergency, while also reducing financial stress and giving us more autonomy over our lives.
The best way to build your emergency fund is by always making sure you pay yourself first and set aside a portion of all money you receive as savings.
I’d recommend keeping your emergency fund in a highly liquid, SDIC insured account with high interest.