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!
In fact, according to one financial advisor we spoke with in our article on 3 Major Financial Mistakes Singaporeans Make Too Often, 9 out of 10 prospective clients he meets have no emergency fund in place!
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 Singaporeans Need an Emergency Fund?
Can you predict when you’ll get into a car accident, suffer a major injury at work or get retrenched? Chances are almost certain that if one (or more) of these unpredictable, life-altering events occurs – you’re going to have to dig deep into your pockets to pay the expenses.
An emergency fund is simply a sum of money you set aside to pay for any financial emergencies that may arise, such as:
- Car Accidents
- Workplace Injuries
- Medical Expenses
- Home or Automobile Repairs
Building up an emergency fund gives you the financial “buffer” you need to pay any out-of-pocket expenses – that way you don’t have to rely on loans or credit cards to cover any financial emergency that may pop up.
If you have insurance to cover any of the financial emergencies above – great! Insurance is a great way to cover the bulk of the expenses. But even with insurance, there’s the possibility you’ll still need to pay any amount over what your policies will cover.
Having an emergency fund should be a major financial priority for every Singaporean – and should come before saving or investing for retirement.
How Much Cash Do You Need in Your Emergency Fund?
Many people have many answers to the question of “how much” cash you should be saving in your emergency fund. But what’s the real answer? It depends.
It really depends on whether you make a fixed or variable income.
If you’re making a fixed income, you should consider yourself lucky – because it’s easier for you to gauge how much you can save every month after doing a cash flow analysis with your financial advisor.
For fixed-income earners, the magic number to save up to is 3 to 6 months’ of expenses – that means everything from your home loan repayment to your phone bill. So if your monthly expenses tally to $2,000 every month, you should have $6,000 to $12,000 in your emergency fund.
If you’re making a variable income, figuring out how much you should be saving each month becomes a bit more… complicated. That’s because variable incomes change from month to month.
For fixed-income earners such as business owners, salesmen and self-employed individuals, the magic number should be much higher – as much as 7 to 8 months’ of expenses. That’s because it’s very difficult to predict what your month-to-month income will be.
So if your monthly expenses tally to $2,000 every month, you should have $14,000 to $16,000 in your emergency fund.
How Can You Build Your Emergency Fund?
Yes, building up your emergency fund might not be the easiest feat to accomplish. That’s because how fast you build it really depends on your salary, liabilities and your debt obligations (especially credit card debt).
That’s why it’s very important to meet with a financial advisor to develop a financial plan to meet your goals, which includes building up an emergency fund. One of the biggest obstacles to building up an emergency fund is cash flow.
If your liabilities take up most of your income and you’re only saving $200 a month, it’ll take 30 months to reach $6,000.
But if you can free up some income by cutting back on some expenses (dining out, movies, etc.) and generating additional revenue streams (freelancing, tutoring, etc.), you can cut down that 30 month waiting time by 50% or more.
If you’re having trouble saving up or feel discouraged by the amount you must save up, consider this popular approach to building up your emergency fund – start small. Start out by saving at the very least $1,000 in a savings account and work your way up to another $1,000. Then keep on repeating this process until you reach your goal.
After all, it’s easier to reach smaller “waypoints” on your journey to build an emergency fund than trying to “scale the mountain” in one go right?
Keep Your Emergency Fund in a Savings Account!
I know, savings accounts in Singapore tend to offer rather pathetic interest rates. But earning 0.8% to 1%+ is still much better than earning 0.01% to 0.05%. The thing is that you want to stick with a savings account for one major reason – liquidity.
If you tie up your emergency funds in stocks, bonds or mutual funds, you’re not only putting your cash at risk if the market dips – you’re making it harder to get to your cash quickly if disaster strikes!
What would you do with your emergency fund, let it sit or try to grow it? Share your thoughts with us on Facebook! For even more useful information on everything personal finance, visit MoneySmart today!
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