Let’s be honest – it’s unbelievably hard to save money in Singapore. And the fact that the cost of living is always rising while wages stagnate isn’t making things any easier on the average Singaporean.
In fact, according to a recent Singapore Business Review article, almost half of Singaporeans have little or no savings at all. That’s bad news, especially if you’re one financial emergency away from economic ruin.
Fortunately, it’s still possible to turn your financial situation around – and building up an emergency fund is a huge step in the right direction.
Why do you need an emergency fund?
Unless you have the ability to see into the future, there’s absolutely no way you can predict when disaster will strike. And unfortunately, it only takes one major life-changing event such as a major medical operation to drain whatever savings you have accumulated for retirement, leaving you with huge debt(s)
That’s why you need an emergency fund – to act as a financial buffer to protect your savings from life’s unexpected disasters, such as:
- Medical expenses: Even though MediShield covers much of your hospital bill, you’ll still need to pay a deductible and co-insurance. And depending on your condition, length of stay and hospital ward, the bill(s) can easily drain your Medisave and your savings.
- Retrenchment: In the event you get retrenched, you’ll need to have at least three months’ worth of expenses saved up to keep you afloat financially (e.g. if your expenses total about S$3,000 a month, you’ll need at least S$9,000 in your emergency fund to survive).
- Home/Auto repairs: Repairing your car or your home’s major appliances such as the air-conditioning unit(s) or refrigerator can easily cost hundreds or thousands of dollars
However, even with insurance, you’ll still need an emergency fund to cover any out-of-pocket insurance costs you must pay when making a claim such as deductibles.
How much do you need for your emergency fund?
Before you build your emergency fund, you must first answer one very important question – how much money do you need to save up?
The answer to that question depends on whether you’re making a fixed or variable income.
If you’re earning a fixed income, saving up for an emergency fund is easier simply because you know exactly how much cash flow you can expect each month.
Ideally, you’ll want to build up an emergency fund equal to three to six months’ worth of expenses – that includes factoring your mortgage, credit card repayments, insurance premiums, transportation costs, groceries, and utilities.
Let’s say you monthly expenses are S$3,000 every month – that means you’ll need to have an emergency fund of S$9,000 to S$18,000 on a fixed income.
If you’re earning a variable income, it can get a little tricky as your income varies from month to month. Because of that variability, you’ll need to have a much larger emergency fund of around seven to eight months’ worth of expenses.
Let’s say your monthly expenses are $2,500 every month – that means you’ll need to have an emergency fund of S$17,500 to S$20,000 on a variable income.
How do you build your emergency fund?
There’s no such thing as an “easy” way to save up an emergency fund. Depending on your financial situation, it might take a long time to build one up – but it’s something that must be done.
It’s recommended that you meet with a certified financial adviser to help you analyse your cash flow to see how much money your current liabilities and debts allow you to save up.
Let’s say that you make a fixed income of S$5,000 a month but your liabilities take up about S$4,500 – that leaves you with about S$500 a month to put into your emergency fund.
If you need at least 3 months’ worth of expenses to build up your emergency fund – that means you’ll need at least S$13,500 – which will take you 27 months to build if you put in S$500 every month. And that’s OK.
Remember, it’s not important how fast you get there. What matters is getting there in the first place.
If you feel “motivated” to reach your emergency fund goal faster, you can always consider building up additional streams of revenue by freelancing, working part-time to earn extra income, or even investing to establish passive income.
By following the tips above, you can ensure that you have the financial buffer to survive a financial emergency. On a final note, it’s a good idea to separate your emergency fund from your other bank accounts (so that you’re not tempted to touch it!).
Want the best financial deals in town delivered to your inbox once a month? Sign up for iMoney’s Monthly Round-Up today!