It’s a rule of thumb to save at least three to six months of living expenses for an emergency fund. But what if you’re on a tight budget and have limited savings?
As the name implies, ’emergency fund’ serves as a financial reserve for unanticipated expenses. The question is, how well-equipped are your emergency finances to meet an emergency situation? Emergency funds are a vital financial cushion to rely on in times of crisis and, therefore, require substantial savings.
We may never know what the future holds, especially in today’s volatile economy. One must always be financially stable and ready for whatever life throws. The first step toward a secure financial future is building an emergency fund, which requires you to prioritize your own needs financially so that you can support your family when they have financial difficulties.
What's an emergency fund?
An emergency fund is a stash of money set aside for “bad times.” It is not intended for purchasing a one-time payment of a luxury. Having this money on hand can be helpful in the event that you lose your job or need to deal with some other kind of financial emergency. You’ll be able to handle the problem without resorting to high-interest payday loans or maxing out your credit cards to cover the cost.
Anything can be considered an emergency if it’s an ’emergency.’ Have you been in a car accident recently? Water stains on your ceiling because of a leaking pipe? Have you recently lost your job and your source of income? Every unforeseen event can be considered an emergency.
Here are a few examples of when it may be wise to have an emergency fund:
Income loss
Most people save up an emergency fund to provide them a financial reserve in case they lose their job, have their salary reduced, or become disabled and unable to work, all of which can significantly impact their financial stability. It could take a while to find a new job after a retrenchment, especially if you need to retrain.
An emergency fund can help you meet your essential financial obligations while your income becomes stable.
Replacement of old appliances
Due to work-from-home arrangements, computers and smartphones have become increasingly in demand and have been an important part of our lives. Having emergency cash set aside ensures you can quickly and affordably replace them if they break down or get stolen.
In the event of a major appliance failure, such as a refrigerator, air conditioner, or washing machine, you will be able to pay for the necessary repairs or replacements with your emergency fund.
Health emergencies
Even if you have adequate health insurance, it is still essential to have access to emergency funds in the event of an accident or other medical emergency. Sometimes you need to pay for something out of pocket before you can file an insurance claim. Other times, you need to cover the costs immediately for a loved one but don't have access to that person's insurance details.
Life-changing medical emergencies can significantly increase our expenses. For instance, you might require assistance for a few months or need to participate in physical therapy. Having an emergency fund set up means you won't have to worry about how to pay for these extra expenses while you get better.
How much should you set aside in your emergency fund?
What types of emergencies do you wish to cover?
It is critical to be realistic while determining the nature of these emergencies. The whole point of an emergency fund is to have a cushion in case anything unexpected happens, so it would be futile to adjust your list of emergencies to reduce the amount you’d have to put in.
According to ValueChampion (2021),here are some of the estimated costs of an emergency:
- Moving your home – $374
- Monthly car rental – $2,119
- Heart attack ER visit – $2,603
- Kitchen oven – $3,400
- Funeral – $5,632
Your emergency fund should be enough to cover three to six months of living expenditures. To figure out this amount, add all your essential monthly costs, like food, rent, utilities, insurance, etc.
For example:
Instead, you should not risk your primary funds on these unforeseen expenses but use a savings cushion. Therefore, even if your budget is tight, it’s essential to always set some aside in an emergency.
- Consider it a self-investment
- Look for account savings with high-interest rates
- Check the allocation of your funds
- Reduce your spending
- Diversify your sources of income
- Liquify your savings
Consider it a self-investment
Having an emergency fund is like receiving a bonus check from an employer; it’s a way to compensate yourself for a potential loss. That’s why it’s wise to open a separate savings account and put aside a fixed amount of money each month.
By putting the same effort into building an emergency fund as you would into your regular savings, you instill discipline and attention towards actively developing it. With a good mindset, you can make saving for an emergency fund a top priority because you will consider it a requirement rather than an option.
But if you aren’t convinced enough, consider this an investment in your future resources, giving you more safety and confidence when times are tough financially. No one wants to be caught off guard and in a position of financial helplessness.
It’s essential to replenish your emergency funds if they have been drained during the first two years of the pandemic because another economic downturn — a recession — could be on the horizon.
Take advantage of the high-interest rates
Even though interest rates have dropped at many banks over the past year, there are still some good high-yield savings account options. Generally, the starting interest rate for savings accounts is 0.05% per year. Account holders must meet the criteria to increase such figures.
A few of the most well-liked high-yield bank accounts are the CIMB FastSaver, DBS/POSB Multiplier, UOB One, and OCBC 360.
For instance, if you plan to open an account, you may wish to do so with CIM since it’s the least complicated savings account because the only requirement is to maintain a balance of $1,000 to earn the promised interest rates.
CIMB FastSaver offers one of the highest realistic interest rates for a savings account at 1.8% per year, given that you sign up with the CIMB Visa Signature card and spend a minimum of $300 per month.
On the other hand, if you credit your salary and link it with a UOB debit or credit card to your UOB One account, you’ll earn 0.5% p.a. on the first S$15,000. Quite a substantial boost, indeed!
Alternatively, DBS/POSB Multiplier and OCBC 360 also provide competitive rates of 0.4% p.a. and 0.35% p.a. at the first interest tier upgrade. However, account holders must go through additional hoops to earn a greater interest rate.
To start a savings account, you should think about your spending habits carefully.
Check the allocation of your funds
U.S. Senator Elizabeth Warren made this straightforward guideline famous in her book “All Your Worth: The Ultimate Lifetime Money Plan.” Despite its apparent Western provenance, the concept is relevant in Singapore. You can easily apply this approach by dividing your earnings into three categories:
- 50% is allocated to necessities
- 30% is allocated to wants
- 20% is allocated to savings
This is a simple guide that works effectively. It’s basically dividing your savings into three categories, which is as simple as that. Additionally, it guarantees that you have funds set aside for every spending category. Any spending you can imagine falls into one of these three categories.
While this is a good breakdown, some people on a tighter budget may want to adjust the allocation rate. So instead of spending 30% of your money on wants, you can replace it with 20% on savings. With the new allocation, 30% will go toward savings and 20% toward wants.
Just do the math before you argue against making that 10% cut in spending.
To reach this percentage, you must put away only S$300 more per month. This S$300 excess can be added directly to your emergency fund without disrupting your savings. Yes, it is that simple.
Depending on how much you put away each month, it should take anywhere from 20 to 60 months to build your emergency fund goal. It is strongly suggested to have extra money that can be put away each month into an emergency fund.
We advise not cutting the other 50% allotted for basic needs, as these funds are absolutely needed to maintain a comfortable standard of living and include things like food, shelter, clothing, and transportation. This is a regular and necessary outlay of funds that cannot be avoided.
Nonetheless, that doesn’t mean cutting back on necessities is impossible. Singapore’s supermarkets have a wide range of prices, products, and sales. In fact, if you’re a savvy shopper who likes to save money, online grocery shopping may be more your thing because of all the continual offers and discounts. You can try shopping at one of the popular supermarkets in Singapore— NTUC FairPrice which offers online orders and deliveries with discounts.
The best part is that you may save a lot of money with the help of a sound cashback credit card or grocery store credit card.
Develop a more thrifty lifestyle
Yes, we get that notoriously frugal people are sometimes looked down on for being stingy, significantly if they save every last cent. However, in reality, if you’re on a limited budget, difficult times will often necessitate desperate means.
Being frugal and frugal-minded is not inherently wrong. Spending less money than you earn is always a good idea.
It’s natural to want to make the most of your youth and invest in things and activities that please you when you’re young. However, this is where the trap lies: too many people indulge in wasteful spending without keeping careful financial habits.
People tend to allow too much room or justifications to be frivolous with their purchases when they aren’t closely monitored. They don’t put any money aside for emergencies and spend more than they can afford. This is why you should save up for those “just in case” moments by putting money aside regularly.
Therefore, having a thicker skin is acceptable, and looking for ways to save money whenever possible.
You can save money by not going out to eat with friends often or by dropping unused subscriptions to online video services. Forget the apparel prices and spend more time indoors.
The formation of a habit takes time. Habits are difficult to break once they’ve been established. Several specialists say that a new habit typically takes at least 30 days of consistent effort. And unless your inspiration can keep you going indefinitely, discipline is the most crucial factor in maintaining your progress.
The process might not be that easy, but what’s essential is to start out by taking baby steps and working your way up to the bigger things.
Use a variety of methods to generate wealth
Personal finance has two main goals: keeping what you have and making more of it. These ideas need no explanation, but how much do we really know about their processes?
An emergency fund is a part of the wealth preservation section while developing numerous sources of income is part of the wealth generation sector. The concepts of wealth creation typically refer to investment for the average person.
Investing for long-term growth has become a necessity in the current economic state. The first startup involves individual effort, but the money works for itself after the foundation is established.
The stability and variety of the assets in such a portfolio are two of its defining features. In the form of dividends or coupon payments, ETFs, unit trusts, blue chip stocks, mutual funds, bonds, and real estate investment trusts (REITs) all reward their investors regularly.
Keep your emergency funds liquid
In the event of an emergency, you would not want your emergency fund to be invested in illiquid or risky assets. Therefore, it’s crucial to keep your emergency money liquid so that you can access it immediately if a crisis strikes.
Money set aside for emergencies should be easily accessible. You should have access to a liquid asset that functions similarly to cash, albeit with more security features. Because when an emergency occurs, you may never be sure how much time you’ll have to get it. Therefore, you shouldn’t invest in bonds or instruments or “safely” allow your pals to keep them.
Avoid putting it somewhere you’d have to wait until business hours or go through a cumbersome process to get it. It’s preferable if you can access it in the wee hours on holiday.
To make things simple, consider opening a standard savings account with access via ATM or transfer through an app. This will keep the funds secure while allowing for easy withdrawal at any time.
Alternatively, you can put money into some types of insurance savings plans, which may offer slightly greater returns. An example is the Great SP, where you can earn high returns. It’s a great choice with no long-term commitment required.