How to set up a personal emergency fund
Financial advisors generally recommend that individuals set aside about 6 to 12 months of their living expenses as an “emergency fund”. This cache is to tide you over life's unforeseen bumps that require extra cash – a medical emergency, a retrenchment or perhaps to help out with a close family member in financial straits.
Now Singaporeans are known to save a lot (about 20% for those under 35), but are you doing it the right way? Putting your money into a savings account and using that for your holiday expenses doesn't quite serve the same purpose. Here's our three-step guide to setting up your personal emergency fund:
Step 1: Establish a monthly budget
You may be asking, “what has savings got to do with a monthly budget”? Having a monthly budget gives you a clear overview of your financial situation – how much and what you are spending on every month, what portion goes to paying any outstanding debts and how much you can afford to save.
Track your spending for two months meticulously so that you have a clear idea of your spending habits. Once you know how much you are spending per month, either make adjustments as you see fit. Then decide on what your target savings amount will be for your emergency fund. So for instance, you spend $2,000 per month, so your emergency savings fund should be set at $12,000.
Remember to prioritise the payment of outstanding debts (like mortgages and car payments) as well since they incur extra interests.
Step 2: Choosing the right savings account
Because the emergency fund should be separate from your regular bank account, it’s a good idea to set up a wholly separate account where you do not withdraw any money at all. Some examples include Standard Chartered Bonus$aver, OCBC 360 and Citibank InterestPlus Savings which reward you with a higher interest rate when you save consistently every month with no withdrawal. Also, ensure that you automate payments to your savings account so that you pay yourself first before anyone else!
A good way to accelerate your savings is to simply deposit part or the entire amount you get for your yearly bonus. You can also build your emergency fund by contributing to the Supplementary Retirement Fund. SRS members can contribute a varying amount to SRS (subject to a cap) at their own discretion and such contributions may be used to purchase various investment instruments.
Step 3: Optimising your cash
While you've set a savings target, it doesn't mean you need to stop there and start splurging the rest of your monthly pay! What you can do is to continue saving up more, especially since our financial responsibilities increase as we grow older – supporting parents, susceptibility to illnesses, having a family and managing a home loan. After you've saved up to 12 months’ worth of living expenses, you can consider other ways to optimise the pool of cash you have now.
For instance, you’ve managed to save a year's worth of monthly expenses and now have a tidy $24,000 in your rainy day account. You might want to consider channelling that $2,000 a month saving habit you’ve inculcated towards investments to grow your money.
Consider lower risk investments such as the Singapore bonds or monthly investment savings plan which uses the principle of dollar-cost averaging to invest in equities. For those who have an even lower risk appetite, you can consider putting your money into fixed-deposits, although with interest rates so low and your funds being locked up, it’s makes more sense to put it into the Singapore savings bond where you can redeem your bonds anytime in case of emergency.
Here so it is, three very simple steps and you can be assured that you are more prepared for emergency situations where you need cash in the future!