Everyone would have heard from a friend, parent or expert that we need to be maintaining an emergency fund. There’s a very simple reason for this – we need to be able to rely on ourselves during emergencies. It could be that our children our parents or our spouses rely on us for their day-to-day living expenses, and we cannot be begging, borrowing and stealing from everyone we know to tide us over during this period.
Let us look into this more closely to determine how much we should be setting aside.
What is Emergency Fund?
It is a sum of money we set aside to be used strictly for the following reasons: (1) Loss of job;(2) an Illness (family included) and; (3) Unexpected big-ticket expenses.
This amount is set aside to provide for the living expenses of our family and us to tide through times of uncertainty. It is meant to be our personal safety net, and not used as downpayment on a big-ticket item such as a car.
Because of this, the emergency fund should be highly liquid. Simply put, we should be able to use it on demand and it should ideally be stowed away in a savings deposit. The Singapore Savings Bond could also be a relatively liquid instrument, requiring approximately one month to draw on it.
How much should my emergency fund be?
A lot of the advise we hear ranges between at least 3 to 6 months of average living expenses kept as your emergency funds. Using the lower end of this spectrum, we take you through our method arriving at a suitable “3 months living expenses”.
There are 3 simple steps to achieve this.
Step 1: Using a budgeting app
To be really accurate, we have to key in the amount spent into the app right away. Allocate the expenditure into the correct type (e.g. grocery, dining, apparel, mortgage). This will bring us greater savings, in terms of rebates and discounts, which we will explain in a while.
Keep this as a habit on all your purchases. It can be quite addictive as the days go by.
Step 2: Consolidate the results of at least 3 months in your budgeting app
Have at least 3 months worth of budget recording data in the app. Sum up all your expenses and divide it by three to obtain the average monthly expenditure.
We would recommend to keep up the habit and reach 12 months worth of data so that it will cover exceptional expenses like birthday and Christmas presents, Chinese New Year hongbaos (for those married), wedding packets, etc. This will make your average monthly expenditure more accurate.
Step 3: Do not stop the budget app process
This is so that you will consistently keep track on whether your average expenditure has increased or not.
I have my average monthly expenditure, what now?
Congratulation, we have unlocked information that all banks and credit card companies want, our spending habits.
Using the budgeting app, we will be able to determine our spending habits and patterns. From there, we can try to cut out needless expenses wherever possible. We could even go a step further and find out how to use the different credit cards in the market to ensure we reap the best rewards or discounts for every dollar spent.
We would recommend using the SingSaver Website to find out the best credit card deals for dining, shopping and even rebates.
Which bank should I store my emergency funds at?
Your emergency fund should be stored in a savings account at local bank. This is to ensure that it will be as liquid as possible. Next, we should try to earn the best returns on this stockpile of cash and find the bank with the best interest rates.
One such bank account is the UOB One Account. And they’ve done a good job with their advertisements around the island – we’re sure you would have noticed. The main benefit of the account is that it provides interest rates of up to 3.33% on your emergency fund.
Additionally, for those of you who are consciously looking to receive rebates on your purchases, the UOB One Card provides up to 5% of rebates and it is complimentary to the UOB One Account which will help increase the potential interest rates on the emergency fund.
Is 3 months of average monthly expenditure enough?
The main reason we recommend a minimum of three-months expenditure is predominantly due to the loss of job. Hospitalization and illnesses should be taken care of by adequate insurance and Medisave Life. Adding on, if we budget adequately, unexpected big-ticket expenses should rarely occur.
Therefore, we have to ask ourselves how many months do we need to find the next job if we find ourselves suddenly unemployed.
For those that will take the first job that comes along, a 3 months average monthly expenditure emergency fund will definitely be sufficient. This is because our unemployment rate is very low with loads of jobs available.
However, if we have a specific industry and sector we will only work at and we know it will take longer to find the correct placement, we should proactively increase the emergency fund to be as much as 9-12 months. This sounds like overkill, but it is always better to be safe than sorry.