Almost every financial advisor you meet will ask if you have an emergency fund in place. You know what the unfortunate thing is? Too many Singaporeans don’t have one!
If you’re not too familiar with what an emergency fund is and how you can build one – you’ve come to the right place.
Why do you need an emergency fund?
An emergency fund is a sum of money set aside for accidents, sudden injury, or an unexpected loss of income. It’s essentially what you keep aside “for a rainy day”.
Unpredictable events can be life-altering as well as expensive, resulting in financial emergencies. An emergency fund gives you the buffer you need to pay out-of-pocket expenses, so you don’t have to turn to loans or credit cards to cover the short-term lack of cash.
At this point, you may be thinking: Isn’t that what insurance is for? Yes, if you have insurance to cover any of the financial emergencies above, it’s a great way to cover the bulk of your medical expenses. But even with insurance, you may find that such unexpected events may result in a loss of income or require additional living costs (e.g. a helper).
An emergency fund should be a financial priority for every Singaporean and should come before saving or investing for retirement.
How much should you set aside in your emergency fund?
An emergency fund should be able to sustain you for 6 months or so, if you do not work. If you’re a first-jobber, you can work towards saving 3 months’ worth of expenses as a first step.
Consider the bare bones expenses of Mr Tan, a working adult in his 30s:
|Food & transport||$500|
|Electricity and utilities||$90|
|Home loan contribution||$800|
An emergency fund that can sustain Mr Tan for 6 months is therefore $1,820 x 6 = $10,920.
For self-employed individuals with variable income, we recommend saving up to 12 months of living expenses, because it’s difficult to predict what your month-to-month income will be during emergencies.
How can you build your emergency fund?
One of the biggest obstacles to building your emergency fund is cashflow. How fast you build it depends on your salary, liabilities and debt obligations.
While you’re still healthy and earning a good income, it is of paramount importance to save the excess and put it aside toward your emergency fund. Yes, we mean it’s more important than that Chanel bag or that Nintendo Switch.
By doing a simple arithmetic of take-home income minus basic liabilities, you can easily see how much extra cashflow you have every month. For instance, if Mr Tan’s take-home income is $3,000, and his living expenses add up to $1,820, his excess cashflow is $1,180.
Now, he could use this excess on clubs and going to expensive cafes for lunch every day, or, he could put this amount aside for his emergency fund.
If he’s disciplined and saves the entire $1,180, he can complete his goal of saving $10,920 in 9.25 months. Not too bad.
If he decides to build slowly by contributing $200 a month, that will take him 54 months, or 4.5 years. But even this is better than not having an emergency fund at all.
If you want to accelerate the process, you could cut back on your expenses even more, or create additional revenue streams by freelancing, tutoring, or having a small home business.
Building an emergency fund might not be the easiest feat to accomplish, but don’t put it on the back burner as it is the foundational step to financial freedom.
If you find that it’s too daunting a task, create waypoints on your journey. Start out small by saving your first $2,000, then the next $3,000, and reward yourself along the way.
What should you do with your emergency fund?
Singaporeans are keenly aware of inflation. The cost of living increases every year, so some of you might be wondering if it is wise to leave your emergency fund in a regular savings account.
While savings accounts don’t offer great interest rates, you should not tie up your emergency funds in stocks, bonds or mutual funds. This is because your emergency fund should be liquid, so you can access it easily if disaster strikes.
At the same time, you should not be dipping into your emergency fund for frivolous nonsense, lest you’ll be left high and dry when a real emergency happens.
A good strategy is to set up a separate savings account that allows you to stash away money so that you are not tempted to dip into it. It shouldn’t have too many hoops to jump through for bonus interest, since you won’t be using it to spend or credit salary. POSB SAYE, CIMB FastSaver are good candidates.
This doesn’t mean that we are against investing, it’s just that an emergency fund should be kept separate and liquid. In the case of our imaginary Mr Tan, when he is done saving that $10,920, he can now lower the amount that he contributes to the emergency fund basket, and start his investment basket.
Set rules for using your emergency fund
1. It must be absolutely necessary
No, having to buy a new pair of shoes because none of your existing ones match that new dress does not count as an emergency.
A good way to decide if it’s necessary is to ask yourself what the consequences of not paying are. If you’ll get into trouble with the law, have debt collectors banging on your door or face bankruptcy, you have the green light to dip into your emergency fund.
2. It will cost you more money if you don’t pay
One example of this is credit card debt, which should be cleared at once. The longer you take to pay it off, the more it balloons. And it balloons pretty damn quickly, thanks to compounding interest. It might not be an emergency now, but if you wait a couple of months, it will be. Pay it off no matter how big a dent it will cause to your emergency fund.
(And then solemnly vow never swipe or tap so much without thinking again!)
3. It will hurt your credit score
Bouncing back from a bad credit score is quite difficult. If you are about the default on a loan, use your emergency fund before your debt spirals out of control.
4. It’s urgent and unplanned
You should only use your emergency fund for something urgent and unplanned — meaning you did not have time to save up for it. A good example of this would be a car accident or getting retrenched.
This means that when you use your credit card to pay for that branded pair of sneakers you can’t afford, you’ve got the entire month to scrimp and save to pay it, rather than resorting to taking money from your emergency fund.
5 very real situations that will make you wish you had an emergency fund
YOLO isn’t fun when you’re actually going through these 5 emergencies.
1. A car accident, coupled with a medical emergency
When you are faced with a car accident, you probably will have to cough out money for car repairs. If you’re faced with the double whammy of a medical emergency at the same time, you have to pay out of pocket before your insurance claims are done.
2. Losing your job
Being laid off or getting fired sucks. If you’re lucky, you’ll find the right job within a month. For the rest of us, we’ll take at least 2-3 months to get substantial work again. With the economy slowing in 2019, that might even take longer. Unfortunately, a lack of income doesn’t stop the bills from coming. This is when that emergency fund comes into play.
3. Unforeseen household maintenance issues
Most homes in Singapore are built to last, but there are many freak events that might lead to unforeseen household maintenance.
Remember the incident of a Singaporean home owner who had her house flooded with sewage? Burst water pipes, electrical fires, a faulty air-conditioning system… Yeah, it’s funny until it happens to you.
These things can end up costing more than you expected. All we can say is, never say never.
4. Pet surgery
For most pet lovers, when those furballs have ingratiated themselves into your lives, the last thing you want to do is to put them down just because you’ve decided you can’t afford a pet. But the truth is, even with the best laid plans of mice and men, there are pet medical emergencies that you may not have anticipated.
Surgery on an animal can cost anywhere between $250 and $2500, depending on the severity of the problem and how long it’ll take the vet. If your pet gets a serious illness like cancer or heart disease, medical fees could range anywhere between $1,500 and $20,000. All of these costs need to be paid upfront, and there are limited pet insurance options available. That’s when having an emergency fund comes into play.
5. Shotgun wedding
Your relationship is all fun and games until a baby shows up. Then cross our fingers you actually love your other half, it is time to start planning a wedding.
You might be okay with a hush-hush ceremony at ROM, but your parents or in-laws might not, so you may feel pressured to shell out money for a decent wedding, ranging anywhere between $20,000 to $50,000.
What would you do with your emergency fund, let it sit or try to grow it? Share your thoughts with us in the comments below.