It’s Not Impossible To Build An Emergency Fund
We all know that we need to save for that rainy day, and many Singaporeans have had cultivated some form of practice of saving money starting from their very first piggy bank.
However, as more life options and commitments enter the picture, the concept of the emergency fund can start to get a little muddled.
Just how much should we save, how do we go about it, and where can we best store that rainy day stash?
Why Should You Have an Emergency Fund?
Some like to spend till the last dollar, some don’t like categorising their savings, and others like to keep all their money invested. The idea of having an emergency fund can feel almost like a party pooper when life is all rosy.
However, having an emergency fund is important simply because having money that can be readily used can help you to tide over difficult times, whether it may be yours or your loved ones.
The main thing that differentiates an emergency fund from any other form of savings is that it is liquid and can be used anytime.
If all your money is invested in property, for example, you may not be able to easily and quickly sell your property in an economic crisis, or you may have to accept a price at a loss.
Getting Started on Your Emergency Fund
Building an emergency fund requires some discipline, especially because there isn’t a reward at the end, unlike saving for goals like making a down payment for a house or going for a big holiday.
However, it is also a fund that doesn’t need to be increased very much once your goal is reached, unless there are major life changes like having a new baby in the family that you need to account for.
In general, aim for about six months of expenses that include your monthly debt obligations like mortgage or car loans. This will enable you to tide over about half a year of unplanned unemployment should that ever occur.
Of course, if you plan to leave your job for a certain period of time that should be consciously saved up for so you don’t have to rely entirely on your emergency fund.
Saving up for your emergency fund from scratch can be done with the following guidelines:
1. Prioritise Emergency Funds Right After Essential Monthly Expenses and Debt Payments
This means that once you’ve set aside money for food, transport, and loan repayments, the next chunk of money to set aside is the emergency fund. Say you have $1000 left, you can choose to set the whole sum aside to build up your funds a lot quicker, or set a fixed percentage for every month.
2. Track Your Expenses and Limit the Unnecessary
The less you spend, the more you have to save. Much of your monthly spending could actually be coming from wasteful and avoidable expenditure like too many nights out in a month, or a dependence on Uber and taxi rides.
If you don’t have an emergency fund yet, focus on building that up to as close to your goal as possible. Go for smaller getaways or spend less on shopping, these can come in when you’ve reached your goal.
3. Automate Your Savings
Self-awareness about your own lack of discipline is half the battle won. If you’re unlikely to save consistently but still want the results, then sign up for a deposit account that automates it for you.
4. Direct all Your Bonuses Towards Your Emergency Fund
If saving from your monthly salary is going to be too difficult, then consider directing nearly all of your bonuses (assuming you have them) into your emergency fund instead of spending it all. It’s painful, but remember, once you hit your target, your future bonuses can be used more freely.
5. Do a High-Intensity Savings Programme
You’ve heard about high-intensity workouts that burn lots of calories in 30 minutes. With emergency funds, a hard-hitting approach can work well since the goal is fixed and a lot more reachable than long-term savings, which require consistency and patience.
Brace yourself for a few months of intense scrimping, and you may even develop a habit of being thriftier once you’ve gotten used to the rhythm.
Where to Keep Your Emergency Fund?
It’s important to keep your emergency stash in the most liquid state that you can so that it truly serves the purpose of being usable in case of emergency. You don’t need to roll up your notes and put them in a biscuit tin, but rather, look for an account that gives you the highest interest rate and keep the ATM card for it locked at home.
The interest rate makes a difference when you are saving for long-term. For example, a savings account offering 0.40% per annum translates to S$25 at the end of two years.
However, a deposit account with 1.45% per annum interest rate will give you S$73 for the same tenure. That’s an additional 192%!
Once you’ve reached your goal, you can breathe a lot easier, but do remember to review it as and when major life events happen so that your emergency stash matches your needs.