Do you have an emergency fund? If you do, that’s fantastic! If you don’t, please check out our article Why Every Singaporeans Needs an Emergency Fund – And How You Can Build Yours.
Having an emergency fund can really mean the difference between financial peace of mind and disaster – especially when it comes to unexpected events such as workplace accidents or retrenchment.
Having the cash on hand to cover out-of-pocket expenses (via your emergency fund) means you don’t have to resort to dangerous sources of cash such as credit cards or your friendly neighbourhood Ah Long.
But one question some Singaporeans have about their emergency fund is this – should you keep your emergency fund in cash or grow it through investment?
You’re Right – Most Savings Accounts Won’t Grow Your Emergency Fund
Scary statement, isn’t it? Does that mean you should panic? No – well, not too much. But you should keep in mind that that because savings accounts in Singapore have horrendous interest rates (0.01% to 0.05% for a “basic” savings account!), your money is basically feeling the full force of inflation – which rises by 2.5% to 3%+ each year.
Yes, that means the value of your emergency fund is actually decreasing by that much every year. Sadly, even the “best” savings accounts out there only earn 0.8% to 1%+ interest.
However, many banks right now are coming out with “Multiplier Schemes” that allow you to earn 1.88% to 3.05% interest on your savings account – provided you reach a certain “cash flow” every month (salary deposit, credit card spend, bill payment, etc.).
Fortunately (if you have the cash flow), you have the chance to beat or at least remain on par with a multiplier scheme.
Should You Gamble With Your Emergency Fund by Growing it Through Investing?
That’s the question many Singaporeans have when it comes to their emergency funds. If you ask any average Singaporean whether they prefer to see their funds grow at 1% or 8%, of course every Singaporean is going to go with 8%!
If we were talking about growing your retirement nest egg, then yes, 8%+ would be great! But your emergency fund isn’t your nest egg – it’s supposed to be a highly accessible, low-risk source of cash you can immediately draw from when disaster strikes.
Here are several reasons why it might not be a good idea to gamble with your emergency fund by investing it:
- You Gotta Keep Em’ Separated: While it might be tempting to put your emergency fund into diversified investments so that you can grow it by 8% or more every year, you’ve got to keep in mind that the purpose of your emergency fund is to “fund” your retirement – it’s meant to be a readily available cash source you use during financial emergencies that require out-of-pocket cash.
- It’s Risky: Yes, the possibility of earning 8% interest or more on your emergency fund sounds great… in theory. But reality is much different. What happens if you dump your emergency fund into high-risk, high-return stocks that end up tanking? You might end up with an emergency fund that’s worth less than it was before you decided to invest it all.
- Investments Aren’t as Liquid as Cash: Financial emergencies can happen anytime. And when they do, you’re going to need cash urgently. Having your emergency fun in a savings account allows you to withdraw whatever amount you need quickly and easily, whereas having to sell stocks will take a little time and require you to pay a commission to your broker.
Remember, emergency fund should be used for just that – emergencies. Once you’ve build a comfortable emergency fund that’ll provide a good buffer against the unexpected, then you can start to look into investing to grow your next egg.
If you’re still new to the investing game (it’s ok, we all have to start somewhere right?), don’t forget to check out our article The 4 Biggest Investment Decisions Every Investor Should Never Forget. Also, check out our Investing Learning Center for some more great tips.
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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