Financial Planning | Personal Finance | Article
Prepare For Unpleasant Surprises With An Emergency Fund: A Step-by-Step Guide
by Bryan Lim | 2 May 2023 | 7 mins read
This article is brought to you by Singlife
When it comes to surprises, people seem to be split down the middle on whether they like them or not.
However, the one thing most can agree on is that no one likes an unpleasant surprise in the form of unexpected expenses or loss of income.
That’s where an emergency fund comes in — it’s a pool of money to tap on for ‘rainy days’. It saves you from busting your budget, putting a pause on your longer-term goals, or having to take on more debt just because something unexpected cropped up.
Some real-life situations that require an emergency fund include the sudden loss of jobs, unforeseen medical emergencies or replacing broken or older models of electronics and appliances.
Generally, it’s recommended to have at least three to six months’ worth of living expenses saved up in your emergency fund, but this amount can vary depending on your financial situation. For example, if you have kids or are self-employed, you may need more savings to tide you over.
Starting an emergency fund can be daunting, regardless of how much you need, so we’ve broken down the process step-by-step to help you get started.
Step 1: Figure out your monthly living expenses
If ever there was an opportunity to take stock of your expenditure, this is the time.
You’ll have to calculate your monthly expenses — such as food, transport, bills, insurance payments and rent (if applicable). Of course, the older you are and the more financial responsibilities you have, the more complicated this list becomes. It’s always best to start planning early.
For a young adult who is living with their parents rent-free, this is how their monthly expenses might look.
As the emergency fund is strictly meant for ‘rainy days’, we’re not including things like entertainment expenses or your monthly subscription to streaming platforms. After all, these are things that can be cut to save money.
Step 2: Multiply that amount by three
Once you’ve figured out the monthly ‘damage’ to your wallet, the next step is to determine how big your emergency fund should be.
As mentioned, conventional wisdom dictates putting aside at least three months’ worth of living expenses, so you’ll need at least $3,000 ($1,000 X 3) in your emergency fund.
However, you might want to put aside more money, according to your personal circumstances.
For instance, if you are providing for your family, are self-employed with variable income, or want to be prepared in case you lose your job during an economic downturn, you might want to buffer for a longer duration.
In this case, it might be prudent to budget up to 12 months’ worth of living expenses.
Step 3: Set an amount to save each month
Now that you’ve got a goal to save towards, you need to actually start saving.
Start by figuring out how much of your monthly income can be set aside for your emergency fund, so you’ll know how long it’ll take to save.
This will sound like a primary school problem sum, but assuming you need around $6,000 in your emergency fund (and you’re starting from scratch) and can only save about $300 a month, it’ll take you about 20 months to get your fund ready.
Of course, the amount you can save also depends on how much you make and other financial responsibilities, but the recommended amount is 20% of your monthly income.
Step 4: Find ways to grow your emergency fund faster
Put funds into a liquid, interest-bearing stable product account
Instead of letting your money sit in the bank with a measly annual interest rate, why not let it work for you?
When deciding where to put your money, bear in mind that your emergency fund needs to be placed in a product that has ultra-low risk and is easily accessible.
You’ll also want to ensure there are no additional fees incurred (for example, a penalty for falling below a certain account balance) when you need to withdraw money.
Cut expenses or hustle on the side
Aside from setting aside a portion of your monthly income or choosing to put your funds into a suitable financial instrument, you should also look at other ways to speed up your savings.
The most direct way is to cut down on unnecessary expenses — ask yourself, do you really need to eat at a restaurant every week or have a Starbucks coffee every morning? Remember, the faster you build your emergency fund, the more secure you’ll feel spending on your wants knowing that you have a backup plan if life decides to throw you some curveballs.
You could also consider starting some side hustles to get more income or put more of your bonus towards building your emergency fund quicker.
Planning for your emergency fund isn’t an easy process – we get it.
Firstly, it’s tough to evaluate your monthly expenditure and feel the shame and regret when you realise that you could have saved hundreds on cab fares or your daily artisanal coffee, or both.
Secondly, forced savings is always hard because it means we have to sacrifice the finer things in life, which may include cutting back spending on our hobbies or adjusting our lifestyle.
However, the sooner you start on it, the faster you can protect yourself against unexpected expenses and have peace of mind with your finances.
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Protected up to specified limits by SDIC. This advertisement has not been reviewed by the Monetary Authority of Singapore. The information is accurate as of 2 May 2023.