During the normal course of our lives, we often meet unexpected needs that require quick cash. This kind of cash may not be readily available to us and depending on the urgency of the need, we may be forced to borrow quick loans to settle our emergency situation. This is the reason we need to have emergency funds.
Emergency funds come in handy when we are thrown into a drastic turn of events such as a job loss, medical emergency or even when we need to secure something that requires heavy investment such as a house or a car. The main purpose served by these funds is that they protect us against unguarded borrowing. Additionally, they also ensure we do not lapse into a mental or psychological breakdown that is often occasioned by financial emergencies.
What Do Experts Say About Emergency Funds?
Experts advise that about 6 -12 months of your living expenses should be set aside as emergency funds. As already mentioned, the main goal is to be able to face life’s unpredictable financial hardships and possibly avert possible instances of stress and anxiety that are associated with such times.
By setting aside a sizable portion of your income as emergency funds, you will never be a constant guest of money lenders. About 20% of Singaporeans under the age of 35 are known to save a lot but the question many people ask is whether they are doing it the right way.
One way to answer that question is through the setting up of a personal emergency fund and in this article, we shall discuss how to achieve that in three simple steps.
Step-1: Establish A Monthly Budget
The very first step towards setting up your personal emergency funds is to begin by establishing your monthly budget. A budget is a significant tool that will enable you to better understand your financial situation. With a budget, you will have a clearer understanding of how you spend your monthly income. You will be able to know how much you spend on recurrent expenditure such as electricity and gas bills, telephone bills, food and clothing as well as rent and water bills.
After deducting the amount spent on recurrent bills, the next thing will be determining the portion of your monthly income that goes in the payment of debs and loans. As a matter of fact, loans and debts should especially be prioritized as they generate interest and may come back to eat into your emergency funds at some point. Essentially, once you have made these two major types of deductions, what remains at your disposal is the amount you can save.
But how easy it is to establish your monthly budget? It is important to note that your spending patterns in one month may not be taken as a model to be used in analysing your overall spending habits. At the very least, you should set aside 2 months to carefully track your spending in order to come up with a concrete conclusion as to how your spending habits look like. Once you have an idea of your monthly spending habits, you can then move to make adjustments in deserving areas. For instance, if you discover that you eat out voluntarily 4 times a month and you are keen on saving, you could reduce these instances to twice a month, once or even eliminate them altogether.
After making the adjustments, you can now move to determine the amount of money you need to set aside as emergency funds. Usually, it should be at least 6 times your monthly income.
Step-2: Choose The Right Savings Account
After determining what you can potentially save each month, the next thing is to ensure you choose an appropriate savings account. There are many accounts types you can choose but as a rule of thumb, go with the ones that pay higher interest rates while attracting the least fees when you save with them for a long time without making withdrawals. Examples of such accounts include the OCBC 360, Standard-Chartered Bonus$aver, the Citibank InterestPlus-Savings, to name but a few.
And once you have chosen an account, you should proceed to automate all your payments to it. This way, you ensure that payment to the savings account is prioritized. That will shield you from the risks of spending the money intended for savings when you have to deposit it in person. You would also need to accelerate your savings instead of simply relying on the monthly contributions. There are various ways to do this, including reinvesting part or the full amount you receive for your annual bonus as well as contributing to the Supplementary-Retirement Fund. This is a fund that members contribute at their own discretion and is then used to finance some mega or unforeseen financial investments.
Step-3: Optimise Your Cash
Setting up an emergency funds account and committing a fraction of your monthly income to it should not be a license to spend the rest of your money freely. In fact, it should encourage you to save even more. You will need to be as fugal as possible with the rest of your money because as you advance in age, you seamlessly acquire more financial responsibilities. For instance, an emergency fund that was set up when you were 25 and aimed to finance a car purchase when you are 35 may instead be used in supporting your parents or settling your medical bills because these two are some of the situations that are inevitable as you grow old.
Apart from spending frugally, another way of optimising your emergency fund is investing it in a long-term, viable investment. You could take the fund and invest it in real estate through the construction or acquisition of new property. You could also invest it in shares, government securities and bonds, oil rigs or any other long-term investment. This is especially encouraged because money generally loses its worth with time but with a solid investment in place, you will almost always stay afloat.
If you feel a little apprehensive about taking such a risk, there is always the option of fixed deposits. Though they generally earn you little returns, the interests are assured.
Setting up an emergency fund is one way of being sensitive about you financial future. We hope the above steps will go a long way in enabling you take this necessary financial step in your life. But it is understandable that not everyone is able to get enough cash in times of emergencies. Times like these, you may simply approach licensed moneylenders as they have a few loan services that are able to cater accordingly to your needs and capability in repaying as well.