Throughout the second half of 2020, HSBC surveyed 1,200 Singaporeans as part of its FinFit Index study to reveal more about the financial habits, knowledge, and financial security concerns in Singapore. These results, which were published earlier this year, shed light on Singaporeans’ top financial concerns.
Some of the standout financial worries that appeared in all three groups who were surveyed were:
- Unexpected expenses
- Unexpected medical expenses
- Pay cut or income reduction
- Unemployment
- Unable to support retirement life
A separate survey found that nearly half of Singaporeans do not have enough money to cover an emergency.
While the majority of us worry about these unforeseen costs, not more than half of us are actually prepared to deal with them, with only a few of us having what financial experts would consider to be a sufficient emergency fund.
What Exactly Is an Emergency Fund?
An emergency fund is what we call “reserve for rainy days” where we stash away some money for unexpected events.
What is not part of the emergency fund?
- Savings. While your primary goal while saving should build long-term wealth, the purpose of an emergency fund is to act as a safety net for your other savings. Having this reserve means you won’t have to spend down your savings.
- An “extra cash” to be spent on whenever you like. It’s important to use your emergency fund for its intended purpose, which is to help you out in times of emergencies. This is very significant since emergencies, by their very nature, cannot be planned for. There is no way to predict when you may need your emergency savings. Hence, these funds should always be available.
- Investments. In contrast to savings, investments might potentially increase the accumulation of wealth. It always comes with the risk of losing money and/or experiencing other negative consequences. Such things do not blend well with emergency savings.
The Advantages of Keeping an Emergency Fund
What is the purpose of an emergency fund?
Emergencies are expensive. What’s worse is that it has the ability to throw even a financially well-off person into a downward spiral of debt.
It’s true that in some cases you can handle an unexpected expense with cash on hand, such as by tapping some of your savings or even just the extra money you have after paying for all the bills.
However there are some that might completely devastate your finances and leave you with nothing but debt.
Lessen Financial Worries
Having an emergency fund can help you lessen the financial impact of these emergencies. It’s similar to insurance, where its meant to protect you in an unexpected events
You cannot forecast when an emergency may occur, but you can prepare for it. Without an emergency fund, you risk having to hunt for money, where you may be forced to borrow money. Borrowing a small amount of money might appear affordable but will cost you more.
As a matter of fact, the cheapest debts to take on have the highest interest rates. For instance, credit cards make it easy to spend money you don’t have, but the high rate of interest you’ll pay over time makes that option less appealing. This is why so many people are unable to pay off their credit card balances. Typically, the outcome involves paying back more in interest than was originally borrowed.
Loans and credit card debt transfers, on the other hand, may have lower interest rates but are more difficult to obtain. In any event, whatever interest you pay would be unnecessary if you had an enough emergency fund.
Keeps your other financial priorities intact
It’s similar to packing an emergency kit for use in times of crisis. You prepare for the worst by anticipating potential emergencies and packing accordingly. Not all emergencies involve catastrophic events, but all will require immediate financial attention. Here are some examples:
- Home appliance failure or home repair
- Car accident
- Job loss
- An illness or personal injury
- A loved one’s death
Prices for these might range from the several hundred to the several thousand dollar range. They might also be as basic as a one-time pay or a recurring charge. The key point to keep in mind is that you will have to pay for these costs regardless of your plans. These are generally unanticipated but inevitable expenses.
This is an essential point to emphasize: they are inevitable and necessary. Hence, only use your emergency money if the expense is both an emergency and necessary.
Certain costs may appear urgent, but they can usually be avoided. It’s only human to try to justify our desires by telling ourselves they’re “essential.” For instance, when you’re moving out, it may make sense to rent a good apartment. However, renting the most expensive apartment may not be necessary.
The same is true for purchases: no matter how fantastic a deal it is, if you can live without it, the emergency fund is not for it.
How Much Emergency Funding Do You Need?
How much you should set aside for a rainy-day should be based on the kind of emergencies you’re preparing for.
When determining the emergencies you need to prepare for, it is crucial to be practical. Setting up an emergency fund is useless if you change or alter your list of emergencies so you don’t have to put in that much.
Below are some examples of the average expenditures associated with emergency expenses, as reported by Value Champion:
- Home relocation service: $374
- Average monthly cost of car rentals: $2,119.
- ER visit for heart attack: $2,603
- Oven: $3,400
- Burial costs – $5,632
Obviously, it is not necessary to total up all the costs and match that sum. The goal is to have enough to pay the most expensive bill plus enough cushion for unexpected costs.
If you can’t work for an extended period of time, you can also compensate for that loss of income. Most professionals agree that you should have enough money in your emergency fund to cover your needs for at least six to twelve months.
It’s best to save at least six months’ worth of income if you live in a one-income household or have many dependents. A three-month wage advance is reasonable if you have a partner who is also working or if you are a recent grad living at home with your parents.
How to build an emergency fund in three ways
Having an emergency fund established is crucial, even if you are in good health and able to work a full-time job. It’s important to put some of your money away for emergencies, even if you’re just working a few hours a week or can’t work very hard because of health concerns.
If you have high-interest debts, though, you can ignore this guideline. Focus on them first to avoid squandering your hard-earned money on interest.
Start building an emergency fund by following these steps:
Assess your financial situation
Your goal should be to save aside 20% of your monthly income (after CPF) in case of an emergency. Build a monthly savings plan around this sum to keep your finances on track. The more the amount you put away each month, the sooner you will attain your financial goal.
In reality, however, it may be difficult to set aside 20% of one’s salary, especially if one has other financial commitments. Taking a close look at your household bills and extra cash is another excellent place to begin. Examine these and see where you may make cuts to arrive at a monthly savings goal that works for you. To get started, try to limit your expenditure to what is really required and cut back on luxuries like takeout and online shopping.
Find other means of financial support
You can only save so much before you run into problems, especially if you have other bills to pay. Finding a way to earn extra money outside of your regular job is a terrific strategy to fill the savings gap in case of an unexpected event. Opportunities to earn money from hobbies as well as to teach others through tutoring and master classes abound.
It never hurts to be better prepared, and having a secondary or even tertiary source of income will help you achieve just that.
Create a second savings account for unexpected expenses
In other words, you shouldn’t use your emergency money to build wealth. The value of your money may decrease if you invest it in stocks or mutual funds before you need the money. Withdrawing money from investments can take several business days, which could be too long in cases where payments are urgently needed. Your savings for times of emergency should be kept in cash and easily accessible.
Having an emergency fund is important, but it shouldn’t be easily available in case you’re tempted to use it for other, less important expenditures.
The most prudent course of action is to set aside this sum of money in a savings account that is used only for emergencies, so that you won’t be tempted to spend it on frivolous matters.
Check on your savings plan every six months
Your emergency savings should evolve alongside your lifestyle, income, and requirements. Six months from now, evaluate whether or not your emergency fund continues to provide for your essential living expenses. Then, replenish your savings if you find it necessary to do so.
When you earn a pay increase, bonus, or any other windfall, you may want to reevaluate it. It won’t feel too bad to pad your savings with some of this money because it isn’t something you regularly spend.
Get a head start on building your emergency fund by prioritizing your needs
Your ability to handle whatever challenges you face in life depends on how well-stocked your emergency fund is. Don’t wait until you’re older, sick, or with less disposable income to start.
Once you have accumulated a sufficient emergency fund, you will have more financial leeway to begin putting money away for intermediate and long-term goals. Until then, it’s crucial to put aside a nest egg to ensure your financial stability in the future.