The comfort that comes from knowing you have enough money to get by when life throws you a curveball is immeasurable.
That’s why it’s crucial to have some money set aside in case of an unexpected expense. In the event of an unexpected financial setback, such as the loss of a job, you would be able to cover immediate expenses like medical bills, auto repairs, and rent or mortgage payments without having to wait for reimbursement from insurance.
While experts recommend having enough savings to cover at least three to six months of living expenses in case of an emergency, everyone’s circumstances and goals are unique. This means that some of us may need to increase more savings.
If you have set up a sufficient emergency fund, you’ll be free to concentrate on other, more pressing problems. This could be handling an emergency, being there for a loved one emotionally, or simply having the option to do something like take time off work to focus on a hobby.
The question of how much is “enough” can be subjective, but here are four scenarios from which you may relate to.
1. I'm the sole provider for my family
The financial burden of being a single provider can be overwhelming. You are responsible for your own financial needs as well as those of your dependents.
Here are some things to think about when you make your financial plans.
How many people rely on you financially?
The more people who rely on your income in your home or family, the larger the savings fund must be.
As an illustration, a newlywed couple without children and financially dependent parents has significantly lower financial commitments than a person with two young children, a spouse, and elderly parents to provide for.
What are the different life stages?
Knowing how long you have to provide for them can help you determine how much money you will need to save aside.
If your child is just starting kindergarten, you’ll need more savings to cover their dependence than if they’re already a college student.
2. I'm searching for a career change
If you’re thinking about making a career change in the middle of your career, you should save up as much money as possible in case finding a new job takes longer than planned.
Your job hunt could get derailed by things like market volatility, a slow economy, or just the difficulty of finding the right position for you.
What sort of lifestyle are you looking for in between jobs?
Will your lifestyle change from when you were earning a regular salary? Make sure your budget reflects the fact that you have no plans to change your current living arrangements.
Do you anticipate any other costs?
During your time off, will you be relaxing, learning something new, or exploring new places? Considering you’ll have to pay for these out of pocket in addition to your regular bills, you should budget accordingly.
3. I work as a freelancer
The money you bring in as a freelancer depends on several factors, some of which you have no control over.
Those who rely on commissions, such as artists, or salespeople, who experience lulls in business due to fluctuations in customer demand, are two examples.
The standard rule of thumb for emergency funds for sole proprietors is 12 months. Central Provident Fund (CPF) contributions should be accounted for in your long-term financial plan and cash flow projections.
Medical savings account contribution
Self-employed people with a net trade income of more than $6,000 per year are required to make Medisave contributions.
CPF Payments
Both the employee and the employer must contribute to the CPF if the employee is paid on a salary basis. If you’re a freelancer in Singapore and want to save more money for retirement, you can open a CPF Ordinary Account (OA) or Special Account (SA) and build your retirement fund.
4. I want to take a break
You may need a break from your profession to refocus or pursue new interests.
Sabbaticals are typically scheduled in advance, so you can figure out how much money you’ll need to save and even let it grow before you take off.
Your cash flow will also be affected by the length of your break and your decision to take paid or unpaid leave.
During your time off, what do you plan to do?
The amount you’ll need to save depends on the kinds of things you want to do while on break. You can have some breathing room in your budget if you plan to investigate pastimes that can make you money.
However, if you wish to continue your education or start a specialized course, this will likely result in increased out-of-pocket costs.
How long will you be away from the country?
Consider the value of the Singapore Dollar in comparison to the currency of the countries you intend to visit if it’s going to be a long trip.
If the exchange rate is favorable, you may want to convert your cash before putting it into a foreign currency fixed deposit to earn interest until you’re ready to take off on your trip.
When you get back, do you have a job waiting for you?
It’s fantastic that your current company is supportive enough to provide you a guaranteed job upon your return from break.
If you want to look for a new job when you return from your break, you should save up for that time as well.
So, now what?
Having a solid financial strategy can alleviate a lot of stress. Having an overview plan that’s customized to your needs will give you an overarching perspective of your assets, liabilities, and financial health as a starting point for your analysis.
When estimating future income flows to assess retirement sufficiency, the majority of financial plans use an inflation rate of 3%. Do remember to factor in rising costs of living by anticipating alternative inflation scenarios of 3%, 4%, or 5% when making plans for yourself.
To protect your savings from the ravages of inflation, you should calculate the effects of these rates on your expected cash flows and retirement plans.
It is vital to factor in funds that will be frozen or have to be put aside for monthly payments such as insurance premiums, investment commitments, taxes, mortgage, and other debt repayments, in addition to typical expenses like electricity, groceries, parents’, and children’s allowances.
The Cost of Insurance Premiums
Most insurance premiums are paid once a year, making them easy to forget about while planning a monthly spending budget. Planning ahead to ensure you have the money to pay your insurance payments and avoid a lapse in coverage is essential.
Financial Commitments
Your budget needs to take into account any fixed investment obligations, such as regular savings plans (RSPs), because these are funds that you are setting up and not for spending.
Taxes
Plan ahead to pay income tax, property tax, and road tax (if applicable).
Paying off Debt
Mortgage payments, especially if you’re paying for them out of pocket rather than out of your Central Provident Fund Ordinary Account (CPF-OA).
Cutting back on expenses
Since income is something over which you have little influence, cutting costs is the simplest approach to boost your savings and cash flow.
If you can’t or won’t give up spending on things like entertainment and gym memberships, at least cut back on these non-essentials. Instead of signing up for many streaming services at once (like Netflix, Disney+, and Prime), consider choosing just one and then switching to another when your current plan expires.
If your mortgage is currently out of the lock-in period and interest rates are favorable, you may want to explore refinancing, repricing, or paying down the loan with your CPF OA in order to preserve cash flow.
You can always choose to conduct a voluntary housing refund to your CPF OA when cashflow is no longer an issue and you have spare funds.
In a nutshell
With inflation reaching record highs, more individuals are feeling the pinch of rising costs and stagnant wages. This makes saving more difficult, but not impossible. You may improve your financial management by concentrating on the areas you can change.
Perform a financial stress test to guarantee you can meet your financial obligations in the event of an emergency. Pay all of your invoices on time and try to reduce any outstanding debt, especially if the interest rate is significant.
You can earn more interest on your money if you invest it in something like a high-yield savings account, fixed deposit, or Singapore Savings Bond (all of which are capital-protected and have no early withdrawal penalty) when you don’t need the money right away.
Get going, already!
Get your financial house in order by consulting a Financial Advisor today.