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—some don’t even know what an emergency fund is!
An emergency fund is a sum of money set aside to cover unexpected expenses or financial emergencies, like medical bills or job loss. You might think that an emergency fund is only for people with high incomes, but the truth is that these kinds of emergency situations can happen to anyone.
In Singapore, we also content with financial challenges like a high cost of living, job market competition, and significant out-of-pocket medical expenses. While CPF helps with long-term needs, an emergency fund is far more liquid, making it essential for immediate financial security during crises.
If you’re not too familiar with what an emergency fund is or how you can build one, you’ve come to the right place. Here’s all your need to know.
Why do you need an emergency fund?
An emergency fund is a stash 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, such as needing a helper or money for urgent home repairs.
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 monthly expenses of Mr Tan, a working adult in his 30s:
| Item | Cost |
| Food & transport | $500 |
| Phone bill | $30 |
| Electricity and utilities | $90 |
| Insurance premiums | $400 |
| Home loan contribution | $800 |
| Total | $1,820 |
An emergency fund that can sustain Mr Tan for 6 months is therefore $1,820 x 6 = $10,920.
The size of your emergency fund also depends on factors like the number of dependents you support, job stability (how secure or volatile your income is), and your lifestyle.
Higher living expenses or uncertain employment may require a larger safety net for financial security. That’s why for self-employed individuals with variable income, we recommend saving up to 12 months of living expenses. 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 luxury watch or Chanel bag.
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—milestones to get you moving forward. Start out small by saving your first $2,000, then the next $3,000, and reward yourself along the way.
3 practical tips to build your emergency fund
1. Automate your savings
Setting up automatic transfers to a dedicated emergency fund account is one of the easiest ways to grow your savings without even thinking about it. The idea is to “set it and forget it”—make saving a habit and remove the temptation to spend the money elsewhere.
Most banks allow you to schedule transfers on a weekly or monthly basis, ensuring that a portion of your income goes straight into your savings as soon as you’re paid. Over time, these small, automated amounts add up to a significant safety net.
2. Cut back on non-essentials
Easier said than done, right? But if you’ve got too much money going out, it’s time to plug the hole. Start by identifying areas where you can reduce expenses—such as dining out less, canceling unused subscriptions, or opting for budget-friendly activities.
You don’t need to eliminate all luxuries, but small changes in your daily habits can lead to big savings over time. For instance, brewing your coffee at home or choosing a cheaper SIM-only phone plan can save you hundreds of dollars annually. The key is consistency!
3. Boost your income
If you’ve cut back as much as you can, it’s time to also consider increasing your income through side gigs or part-time work. Consider freelancing, selling products online, or offering services in areas like tutoring or pet sitting. Any extra money you earn can go directly into your emergency fund, helping you reach your goal faster.
The trick is to allocate this extra income immediately—set up an automatic transfer or deposit it manually. This way, your fund grows steadily, and you’re less tempted to spend the additional cash on non-essentials.
Can you build an emergency fund without an income?
Yes! You absolutely can.
Building an emergency fund without a steady income can seem tough, but it’s possible with a few smart moves.
Start by cutting unnecessary expenses—cancel those streaming subscriptions you barely use or cook at home more often. This reduces your outflows of money.
Next, let’s try to increase the inflows. Sell things you don’t need, like old clothes or gadgets, to get some quick cash. You can also try freelancing or side gigs to bring in small amounts of money that add up over time.
Bottom line: make money and save money whenever you can. Even if it’s slow, the key is consistency. Every dollar saved brings you closer to a solid emergency fund.
What should you do with your emergency fund?
Singaporeans are keenly aware of inflation. The cost of living increases every year due to inflation, 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 the highest interest rates, you should not tie up your emergency funds in stocks, bonds or mutual funds instead. This is because your emergency fund should be liquid—meaning you can withdraw the money anytime and for use in case 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.
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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.
There are also some fixed deposits that have no penalty fees for early withdrawal—RHB is one option. Pay attention: only some fixed deposits are so lenient, and this is the exception not the rule. You must check the terms and conditions carefully. In all likelihood, you’ll incur a premature withdrawal fee.
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.
When should you use your emergency fund?
Only use your emergency fund if your situation meets 1 or more of the following conditions.
1. It must be absolutely necessary
No, having to buy a new pair of shoes because none of your existing ones match your latest outfit 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 darn 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!)
By the way, if you do have credit card debt, consider taking a personal loan to repay it. You’ll incur less interest overall.
3. It will hurt your credit score
Bouncing back from a bad credit score is quite difficult. If you are about to 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 personal accident 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 2016 incident of a Singaporean home owner who had her house flooded with sewage? Gross. More recently, there’s also been flooding from cooling systems in a brand new Tengah flat, blocked water pipes in Ang Mo Kio, an electrical fire at Admiralty… 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
Even with the best laid plans of mice and men, there are pet medical emergencies that you may not have anticipated. And let me tell you as a pet owner myself: vet fees are no joke.
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 should you do after you use your emergency fund?
After you’ve dipped into your emergency fund, it’s time to go back to step 1: build it up.
The same rules apply. Automate your savings, avoid spending on non-essentials, and boost your income where you can. You may need to cut down on life’s little luxuries for a bit, but you’ve done this before. You know how it works, and you remember the satisfaction of hitting your goal. You can and will do it again!
How should you adjust your emergency fund over time?
Things change, life happens, and your financial situation will evolve over time. Your emergency fund needs to evolve with it.
Life changes—like getting a raise, having children, or buying a home—can significantly affect your financial needs, meaning your emergency fund should grow with you. As your income increases, aim to boost your savings by reviewing your fund regularly and increasing contributions. Similarly, if you gain new financial responsibilities, like a mortgage or dependents, your safety net needs to be larger to cover potential emergencies.
It’s a good practice to reassess your emergency fund at least once a year to ensure it still meets your current lifestyle and commitments, keeping you financially secure no matter what life throws your way.
Conclusion
If you’ve made it this far, I hope the importance of having an emergency fund is drilled into you. It’s a financial safety net to catch you no matter how you fall—be it a medical emergency, an unexpected job loss, or an unfortunate accident. You want to be prepared to pick yourself up even if life throws you down.
Already have an emergency fund saved up? Great! Be sure to use it prudently, only if the situation is critical. Don’t forget to build it up again once things have stabilised.
If you’ve yet to build up an emergency fund, there’s no time like the present to start. Even if it’s just a small amount, money is money, and being consistent will grow your emergency stash over time. Moreover, an emergency fund is a crucial step toward your financial freedom and security.
For more advice on saving and financial planning, check out these resources on the MoneySmart blog:
- Retirement Planning in Singapore: A Starter Guide for Confused Millennials
- Short vs Medium vs Long Term Financial Goals: How Do You Save Up for Each Type?
- 10 Best Savings Accounts in Singapore with the Highest Interest Rates
- 5 Best Regular Savings Plans in Singapore: Invest With $100 a Month
Know someone who needs a kick in the butt to start saving? Share this article with them.
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