When you ask anyone for advice when entering the workforce, whether that’s your parent, financial adviser or peers, one of the key things you’ll hear about is to start building up a pool of emergency savings.
Having an emergency fund is a key prerequisite before investing or even getting insurance policies that you have to pay in cash. Without a safety buffer of cash, you might end up liquidating your investments prematurely or causing your policies to lapse due to your inability to pay premiums on time.
But exactly how much should you set aside for your emergency savings? The actual amount you need depends on a few factors, including your risk appetite, how stable (or unstable) your sources of income are, and how much financial responsibility you have on your shoulders.
Why You Need Emergency Savings
It might seem obvious, but in case you’re not convinced, having emergency savings is a form of risk management.
You might be retrenched from your job, which happens more often than in the past, and may take a few months before landing your next job.
Your home or car might suddenly require expensive repairs or maintenance. You could suddenly need to make an overseas trip to visit family or a friend in need.
There might be unexpected annual bills, such as insurance premiums, subscription services or club/gym memberships, that pop up. Of course, you should then take note of them so you can budget for them and not be caught unaware.
Many unanticipated things can happen in life, all of which would benefit from a pool of emergency savings.
With adequate emergency savings, you would also be in a position to make the calculated decision to help someone close who is in a dire financial position.
Calculating Your Fixed Expenses
You might have read rules of thumb that state you should have a certain number of months worth of salary stashed away, but we believe that it would be more accurate to examine your fixed expenses in a month, and keep a multiple of that as emergency funds.
Fixed expenses are things you have to spend on, without which there will be serious consequences. These include your home loan, insurance premiums, the basic cost of food and transport, and recurring bills like utilities and your home broadband and mobile plan.
While calculating your monthly fixed expenses, don’t forget to factor in items you pay annually for, but are actually enjoying the amortised benefits of. These include your personal income tax bill, yearly insurance premiums, as well as home insurance, road tax and motor insurance.
You also need to decide if you wish to cater for “comfort” expenses like your Netflix subscription, gym membership, and restaurant meals. Such things could go a long way in keeping your morale up when the unfortunate occurs.
Depending on how conservative you wish to be, you should ideally have at least 6 months’ worth of monthly fixed expenses stashed away, and even more, if you’re a self-employed individual or have a large variable component of your salary. This is because you might need more to tide you through a prolonged period of tight cash flow.
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Cash Is King, But Credit Can Be Useful
In addition to setting aside cash, having quick access to credit can be invaluable – especially if it comes at no cost.
Credit cards can be a powerful tool to access multiple months of your monthly salary – without needing to actually hold them in cash. You just need to be disciplined in your use of credit cards and only use them for short-term expenses that you are certain you can pay off by the bill due date, otherwise, you will just be postponing the problem down the road, during which the problem can grow out of control.
Read Also: How Quickly Credit Card Debt Can Snowball And Leave You In Financial Ruin
Where To Keep Your Emergency Savings
The nature of emergencies means that you would only have a short notice before it happens. But because emergencies are by definition rare, you also want to maximise the returns on your emergency savings while they are on standby.
High-interest savings accounts like DBS Multiplier, OCBC 360, and UOB One are particularly suited to perform the role of storing your emergency funds for a rainy day.
Not only do they allow you to earn attractive interest, but they also allow your funds to be withdrawn at any time – whether that’s via the extensive network of ATMs, via bank transfer, or digital payment methods like PayNow.
The bonus interest tiers have an added benefit of incentivising you not to touch your emergency funds, and in fact, reward you for saving up even more.
However, it may not be financially prudent to mix your emergency funds with funds that you intend to use for your daily spending. You can consider a separate low-frills savings account with MariBank, GXS or Trust Bank that still allows you to earn a decent interest return while without requiring salary-crediting or frequent transactions to qualify for a relatively good interest return.
Read Also: 5 Types Of Savings Accounts That Every Singaporean Should Have
You can also consider adopting a hybrid approach by keeping a portion of money in these savings accounts while allocating a percentage to relatively liquid and risk-free instruments like T-bills, Singapore Savings Bonds (SSBs) or fixed deposits.
Since the goal is to be ready for contingencies, having your emergency capital guaranteed and there for you is critical. Funds placed in these instruments may take slightly longer to access, such as a few days to a month, so this is something you need to be aware of.
By default, this typically means you should not be investing in the stock market – where the value of your emergency funds could fluctuate a great deal – even if you can access it within a short timeframe.
Read Also: 6 Investments In Singapore That Provide Guaranteed Principal And Returns
Review, Replenish, Repeat
Before dipping into your emergency funds, you should always ask yourself if that purpose constitutes an emergency and whether you will be comfortable with a smaller emergency fund for the duration it takes you to replenish the money. This is because you don’t want to use a large chunk today, only to need it for a real emergency tomorrow.
You can set ground rules for yourself beforehand, and hold yourself to them. In the event you used the funds and feel uncomfortably exposed before the money is topped-up, then it might be a sign that your initial emergency savings fund size is too low and you could revise it upwards.
Be sure to also review your fixed expenses every few months, since your lifestyle and needs might change, and your emergency funds target should reflect it. Another great time to review your emergency savings needs is when receiving a bonus – since that’s cash you didn’t count on anyway, and is certainly less painful than forcing yourself to put aside a certain amount month after month.
The post Working Adults Guide To Starting An Emergency Fund – And How Much You Should Have In It appeared first on DollarsAndSense.sg.