Do You Have an Emergency Fund?
Co-founder and CEO
We all hope that we never lose our job unexpectedly, or face a medical emergency. The emotional toll is enough to deal with, and so you should take the necessary steps now to ensure that there is little or no financial burden when an emergency comes along.
Being prepared for an emergency shouldn’t mean being ready to put a payment on a credit card, or ask for a cash advance at work. An emergency fund will give you the peace of mind to handle whatever comes your way so that it doesn’t compromise your overall financial situation or quality of life.
Here are common questions answered about how to build an emergency fund:
‘How big should my emergency fund be?’
Being prepared means having enough money in your emergency fund to cover whatever may come your way. Ideally, you should have two emergency fund accounts. This setup will ensure that you’re prepared for anything.
The first account should be a liquid fund, which is ideal for immediate use, such as an emergency room visit payment, or an unexpected car repair. This value should be about 3 months’ worth of expenses in immediate cash linked to a checking account.
You should also have a larger, second emergency fund account that will provide you the means to pay for larger events such as losing your job. The value of this longer-term emergency fund should be between 6 and 9 months’ worth of expenses, and should be in a liquid, low-risk investment product that gives you quick, free access to your money at any time.
‘Where should I have my emergency fund?’
First and foremost, you need liquidity in your emergency fund. A savings account was once a sufficient place for an emergency fund due to its high liquidity, but now with such low interest rates, savings accounts are no longer attractive places to put your money if you want the value of the money to grow and keep up with inflation. There are now investment options that allow you to access your money almost just as quickly as you could with a savings account.
Your small “immediate-emergencies” fund should be in a checking or savings account so that you can access it immediately. Your larger fund that covers 6 to 9 months of expenses should be in an investment fund where you can withdraw the funds at any time and at no cost, while it continues to grow with market returns until you need it. Look for investment products and plans that have immediate or very quick liquidity (withdrawals) at no cost, have low risk, and are separate from a debit account so that you aren’t tempted to use it.
‘How do I build an emergency fund?’
Now that you know where to put your money, you need to know what the best strategy is to maximise its value.
First of all, you should build your emergency fund before investing in your other financial objectives. Although saving for the downpayment of your first home probably sounds much more exciting than an emergency fund, it’s best to protect yourself and your loved ones with a safety net as soon as possible.
To build your two separate emergency funds, first assess the amount of cash that you currently have and can contribute to start the funds. Make sure that you build the short-term fund first, whether that means simply putting aside cash you already have, or developing a monthly savings plan until you reach the fund target.
Once you've built your short-term emergency fund, you can start investing into a low-cost, low-risk, liquid investment plan, as previously discussed, for your 6-9 months emergency fund.
Use whatever cash you can as an initial lump sum to accrue more interest and returns on top of your monthly deposit plan. This is a good way to use your savings more wisely and get closer to your target sooner.
If you can reach your emergency fund target with a few large monthly deposits, that could be a simple way to build your fund. Unlike other savings plans that have longer time horizons, emergency funds need to be built as soon as possible, as you never know when you may need unexpected cash. This urgency is important to understand when you are planning out your monthly savings plan, because if you can only put aside RM100 a month, for example, it will take you years to build your emergency fund. If you can’t put aside larger amounts each month due to income and expense restrictions, consider whether you can make broader lifestyle changes. Could you be paying less for rent elsewhere so that you can put more money into your future? Ask yourself if you are willing to live less extravagantly so that you can achieve your future objectives. These lifestyle adjustments will allow you to build your emergency fund more quickly and be prepared for whatever life throws your way.
‘I have insurance, so why do I need an emergency fund?’
Insurance policies can be great, but they are a hedge, not an emergency fund. You should have an insurance policy that covers some of these emergencies, but you should not view it as a cash equivalent. Life insurance claims can take time to process, and so you will often need liquidity before you are reimbursed. In short, you will need significant liquidity, no matter what your insurance will cover.
‘When do I rebuild a depleted or partially-depleted emergency fund?’
If you deplete your emergency fund, rebuild it as soon as you possibly can, even if that means putting aside contributions to other goals. You should commit to a monthly contribution plan until your emergency funds are in good shape again.