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Is an emergency fund the same as savings? How much of it do I need?

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The first step of building your financial wealth is not investing or earning big money. It is to first have a robust emergency fund. 

An emergency fund will cushion us from the uncertainty of the job market and unexpected life disruptions. So that we can dip into it during a financial emergency, without the rest of our lives taking a hit.

What is an emergency fund?

An emergency fund is a pool of funds that you can readily use on a rainy day. This will protect you from selling your investment portfolios at a potential loss, or taking loans at high-interest rates.

The gold standard was to have at least three to six months’ worth of expenses in an emergency fund. This is by the presumption that 6 months is sufficient time to land another job. 

We hear news about a looming recession every now and then. And while we may never know what the future holds, it is critical to be prepared for whatever curve balls life throws at us.

With the generally negative macroeconomic tailwinds, we have seen high employment rates in certain industries lasting even longer than that. And we will recommend you to keep a larger pool of emergency funds if you have dependents or more liabilities such as debt.

Why do you need an emergency fund?

Before we start off with growing our wealth and investing, we have to first build up our emergency fund.

Life is often unpredictable like what we’ve seen during the covid pandemic. One could lose our job, have a medical emergency, disability, or critical illness. 

If we can only choose to dip into our investments, we may be forced to liquidate by selling off our investments in unfavorable times. This means that we may lose part of our capital. 

This is why having an emergency fund is essential. Your emergency fund will be seen as a ‘cushion’ to be able to sustain your lifestyle for at least 3 to 6 months. 

How to calculate your emergency fund

With different expenses, everyone has a different target goal for their emergency fund. To know how much money you need in your emergency fund, we can first start estimating how much you need in a month. 

Tracking your expenses is the first step to knowing how much money is going into each category. by splitting our expenses into needs and wants. 

Needs are essential expenses that we can’t live without. Examples of spending under this category include your housing, food, healthcare, utilities, and transport. 

Whereas, wants are the nice to haves, the extras in life. Things that we don’t necessarily need, but may improve our standard of living. For example, entertainment, dining out, vacations, gym membership, and other non-essential spending.

When you first start, use the total amount that you absolutely need to spend every month and multiply that number by 12. Because in an emergency, it is unlikely that we will spend on the extras. 

How to build an emergency fund

Many of us may put the goal of saving up a 12-month emergency fund on hold. Especially when we are young, healthy and have a stable cash flow.  

Here are some tips that you can take to fund your 12-month emergency fund.

Automate your savings

According to the 50-30-20 rule, you should aim to save at least 20% of your monthly income. This can be done easily by setting automatic deposits into your savings account every time you receive your pay. This way, you are more likely to succeed as you won’t even get to see the money. 

How much you will need to save every month will depend on your saving goals. On top of budgeting for your emergency fund, you can also set a portion for repaying your debt and building your retirement fund.

Reduce your spending

Another way to start is to review your household expenses and identify areas that you can trim down. 

There are many ways to save on expenses, and here are some ideas that you can use.

  • Cut Back on spending on non-essentials
  • Negotiate or reduce better rates for phone bills
  • Declutter and sell things at home
  • Cook more and eat out less
  • Cancel unused subscriptions

Increase your income with side hustles

Saving money can only get you so far. A better way to boost your savings rate is simply by increasing your income. Having side hustles will help you make some extra cash that you can channel to your emergency fund.

It is definitely possible to build additional streams of income even if you work full time. Depending on your skills and availability, there are many opportunities that you can consider. You could monetize your hobbies or even create passive income

Having additional streams of income through side hustles will also help to protect you in case you lose your primary source of income.

Track your progress

Acquiring your first emergency fund is usually an ongoing process. First, try breaking it down into smaller, more attainable goals. And you can check back to see if you are making good progress.

The most important thing to do is to start saving. Every single dollar counts. If you be consistent at stashing money away each month, you will eventually reach your goal.

Where should you keep your emergency fund

We also want to make sure that the emergency fund is kept in the same place, with guaranteed returns. So, they generally cannot be deployed for investments or other higher-risk activities.

These are some of the inert accounts that we recommend that will still generate some returns for us.

High-yield savings account

Having money in a traditional bank account is one of the safest places to store your money. Most of us may be the most familiar with a bank account. Money parked in bank accounts is readily accessible, making it perfect for emergency fund storage. 

The problem is that most bank accounts don’t offer much interest, with some having practically zero interest rates. If you prefer this route, do seek a bank account that offers a slightly higher rate that can help offset the inflation. 

Cash Management Accounts or Money Market Accounts

A money market account is another option if you favour a higher interest rate. Similar to a savings account by the bank, you can access your funds in a money market account from anywhere. 

In Singapore, we can park our money in Syfe Cash+, Endowus Cash Smart, and Grab Earn+ to earn an interest rate up to 2.5%. 

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Do keep in mind that with a money market account, some accounts may charge additional fees such as in the form of management fees that may reduce your actual returns.  

Singapore Savings Bonds (SSB)

If you need more places to park our cash. In this case, SSBs may be a good vehicle for diversification. 

The Singapore Savings bonds are issued by the government of Singapore. The Singapore government has a credit rating of AAA. So this is really as risk-free as you can get. 

You can check the current SSB subscription through the MAS website

These bonds are issued every month with a different set of interest rates for the corresponding bonds. Successful subscription is not guaranteed, and it is by allocation basis. The issuance size of the particular month’s bond will be divided accordingly to the number of applicants. 

While the maturity period is typically 10 years, you don’t need to hold through maturity. You can redeem these bonds whenever you like. 

You can subscribe to or redeem your SSBs via the local banks – DBS, OCBC or UOB’s ATM or internet banking system. However, do note that every time you subscribe and redeem, there will be a $2 admin fee.

Insurance Savings Plan

I think that these Insurance savings plans offer the best of both worlds – it has high-interest rates, offer insurance protection, and also allow you to withdraw your money anytime.

I personally use Singlife and Singtel’s Dash PET. These insurance savings plans are ultra low-risk. Similar to a bank, your deposits are insured by the SDIC with a cap of $100,000.

Get up to $23 cashback when you save and transact with Dash!

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The Singlife insurance plan even comes with a debit card that you can use directly to withdraw your savings. Effectively acting like a “digital bank”, and it also offers the bonus of insurance coverage!

Where not to park your emergency funds

Your emergency fund should ideally be as liquid as possible so that you can withdraw it for your urgent use anytime. For these reasons, we do not recommend putting money in ‘locked up’ accounts like a fixed deposit or your CPF accounts.

Fixed Deposits (FDs)

Fixed deposits are a sum that you promise not to touch for a specific period of time. And in return, the bank or financial institution will offer a higher interest rate. 

Fixed deposits do offer an even higher yield in exchange for the lack of liquidity. But for the same reasons, they may not be the best place to store an emergency fund as early withdrawal of these funds may pose a penalty. You may forfeit your earned internet or need to pay a fee. 

Treasury Bills (T-Bills)

T-bills are another popular option as more people are looking for places with guaranteed returns. And the better deal is, they offer an even higher interest rate than your SSBs. The latest T-Bills pay 3.3%+ for 6 months.

Similar to SSBs, these T-bills are issued by the Singapore government with virtually zero risk. 

However, to redeem these T-bills, you can only sell them in the secondary market. 

While it may not seem that difficult at first, you will realize what I mean by looking at the trading volume for these T-bills. Virtually zero. 

This means while you can sell them, there is no one to buy these from you. So if you’re in urgent need of money, you probably will have a hard time withdrawing your T-bills before maturity.

Central Provident Fund (CPF) Accounts

I hardly have to continue with this section as most of you should already know. 

You can only withdraw money from your CPF after the age of 55. This is when a Retirement Account (RA) is created. And even that is subjected to a few conditions.

Here’s how much you can withdraw, depending on your balances: 

  1. You can withdraw $5,000 anytime, unconditionally;
  2. Any amount above the Full Retirement Sum (FRS) or ;
  3. Any amount above the Basic Retirement Sum (BRS).

The FRS and BRS rates get revised every year to adjust for inflation so this threshold will get higher when it is time for your retirement.

Review your emergency fund regularly

Once we have our emergency fund set up, it is a good idea to review it regularly. Our monthly expenses may change over time and it changes the money we need in our 12-month emergency fund. 

Since we are experiencing record inflation at the moment, we should all check your monthly expenditure every few months to see if it requires replenishment.

Ideally, you should take a look at your emergency fund every 6 months and every time we get a raise or other forms of windfall. It is also a good practice to look at your finances every time you expect a bigger life change. 

When you get a new job or have another addition to the family where more funds may be needed.

Remember to top up the amount in your emergency fund whenever we use them. Since we will never know when the next time we may need them again. 

Save Your Emergency Fund Today

While tempting as it can be to put off saving for a robust emergency fund, don’t put off getting started. It can be much easier to build your emergency fund when you’re young and healthy.

Prioritize building the safety net of cash for financial independence. Once you have reached your emergency fund target you will have more flexibility to start saving for mid and long-term goals. 

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