Man… it sure feels like we’ve been wearing masks forever. As more vaccines roll into Singapore and Covid-19 classified as an endemic by our Prime Minister Lee Hsien Loong, it seems as though the virus is here to stay, and for a long time.
Just as things are beginning to stabilise, it is an optimal time now to begin building your emergency funds, to brace yourselves in the event of another misfortune such as this pandemic.
What is an Emergency Fund?
In layman terms, an emergency fund is cash that you’ve set aside for a rainy day, or for when unexpected situations arise.
This fund is different from the money that you’ve set aside for your holiday plans (no matter how far they might seem at the moment…) or the next big item as a treat to yourself.
Your investments also do not constitute your “emergency funds”. Regardless the total value of your portfolio, it is considered illiquid as it cannot be translated to cash immediately in dire times.
Evident from the Covid-19 episode, where retrenchment, illness and family emergencies cropped up out of the blue, and families began struggling to stay afloat. This is why an emergency fund will come in handy; who knows when another such situation might hit us again?
While things are beginning to stabilise, this is the optimal time to begin your emergency fund. If not now, then when?
How Much is Required?
As mentioned in our previous article, a general rule of thumb would be to set aside three to six months of your monthly expenses. For example, if you are earning a monthly income of $2000, it’s recommended to set aside $6000 – $12000 depending on your personal circumstances.
For some of you guys with a variable income or less stable jobs that may fluctuate with the economy, it is recommended to be setting amounts nearer to 6 months or more. There are many online emergency fund calculators that can help you set a realistic plan, keeping into account your monthly salary and expenses.
Where Do I Begin?
The first step is definitely to save, save, and save. To do that, you first have to set aside a percentage of income. The general rule of thumb is to set aside 10% of your monthly income for your savings, but ultimately, it is up to you to decide if you are able to meet that target, or more, go beyond the 10%.
Next, always remember, to never touch the money in your emergency funds. Yes… I know, going out to a party, or having an expensive meal might sound nice now, and one might argue that this is “once in a while”. But this will kick start a domino effect, as withdrawals get more and more frequent.
After reaching your targeted amount, go beyond it, and continue saving! With the excess amount, you may consider investing them to generate higher returns than the interest given in a savings account to hasten the savings process.
However, it is important to note that along with higher returns, investments come with its own set of risks as well. If you’re unsure about this option and wish to have a consultation, you can contact your financial advisor to know more!
As the world reigns in this pandemic and begins to stabilise, it is important to begin considering setting up an emergency fund to weather through your rainy days. Just as Covid-19 hit us all when we least expected it, who’s to know what the future holds? Safeguard yourselves and your loved ones now, while it’s still possible.