Okay, so you’re here looking for information on emergency funds. Whether it’s because you’ve just woken up to the uncertainty of life or gotten curious about how to build an emergency fund, it doesn’t matter - what matters is that you’ve made the right choice!
Emergency funds are necessities for everyone. They provide a critical fallback resource when disaster strikes, allowing you to spare your savings and other assets the cost of solving the problem.
As such, they’re best thought of as a form of personal financial insurance. They’re also best thought of as infrequently as possible until an actual emergency occurs (to reduce the chances of them being spent for other things!)
Today, we’ll go over everything you need to know about an emergency fund. That includes how to build one, where to keep it, how much should be in it, and more.
But of course, all of that begins with an answer to this question: “What is an emergency fund?”
What is an Emergency Fund?
The emergency fund is just as its name states: a sum of cash that is intended solely for use in defraying the costs of an emergency.
Bear in mind that it isn’t the same as a savings account, because you can use money from a savings account for things that aren’t emergencies. You can withdraw cash for a special dinner date with your significant other from a savings account, for example.
You shouldn’t do the same with an emergency fund. After all, it’s highly unlikely that a dinner date counts as an emergency or a life-or-death situation.
Emergency funds are used for crises you can’t plan for in advance. You absolutely shouldn’t touch them for anything else.
They’re for costs that are impossible to foresee, like an unexpected plumbing breakdown at home or a medical bill that your insurance won’t cover.
An emergency fund may also be a temporary financial cushion for situations like an abrupt loss of income. If you lose your job, your fund can help you pay for expenses until you can find another job opportunity.
The fund can save you as well when a cost pops up that you can’t afford to put off. An example would be an urgent repair to a leaking pipe in your bathroom at home.
None of us knows when life will throw a spanner in the works by hitting us with one of these situations. This is why emergency funds are vital.
Unfortunately, many people no longer bother to build them, whether because the process seems too troublesome or because they don’t know how to begin.
The truth is, building an emergency fund isn’t as much of a challenge or mystery as some think. Let’s go through the steps for it now.
How to Build an Emergency Fund
There are several things to do when building an emergency fund. But before anything else, you have to figure out how large your fund should be.
You need to know this because it sets a goal for your fund-building. Only after you’ve determined your goal can you come up with a plan to build your emergency fund.
How Much Should My Emergency Fund Be?
The examples we gave earlier for situations meriting the use of this fund should tell you something: that an emergency fund needs to be relatively hefty to be effective.
But this is still relative - while more is obviously better, the actual recommended minimum emergency fund amounts vary across cases.
This is because the minimum recommended amount for an emergency fund is typically based on your expenses. You should have enough to cover 3 to 6 months of expenses.
Let’s say you aim for a fund that can cover your costs for 3 months. All you have to do is list down all of your fixed regular expenses per month.
That includes such expenses as your groceries, transportation or petrol costs, monthly rent, utility bills, and so on. If you have dependents, be sure to list their fixed expenses too.
As most of these costs will have minor fluctuations in size per month, you can simply get the average of their costs for several months for a final figure.
For example, let’s say your power bills over the last 3 months have been $114, $150, and $130. You should put $131 as the cost of power per month in your expense tally.
Once you’ve added up all expenses, you can go ahead and multiply the figure by 3.
So, if your household’s monthly expenses come to $5,000, your emergency fund should have at least $15,000.
That’s if you’re aiming for the 3-month sum. You can also aim for 4 months’ of expenses, 5 months’ worth, and so on.
Again, remember that these are just minimum amounts. Once you do hit the figure for 3 months, it’s largely advised to keep going - until you eventually hit the figure for 6 months’ or even 8 months’ worth of expenses.
That way, you’ll have a larger financial cushion when things go awry.
Steps for Building Up an Emergency Fund
Once you know how much you need to put away, it’s time to figure out how to do it.
A good way to go about it is to structure the process of building up the fund. Set a deadline for completing this task first, then divide the target amount by the number of weeks in your “building-up” period.
Let’s take an example.
Again, let’s say your target emergency fund amount is $15,000.
Now, let’s say you’re giving yourself 6 months to put away that amount.
6 months roughly translates into 24 weeks. Divide $15,000 by 24 and you get $625 - that means you only have to put away $625 per week to hit your goal!
Or you can choose to save fortnightly or monthly instead, so your deposits into the fund match the days you get your paycheque.
In that case, of course, the divisor changes: if you’d rather do it monthly, for instance, the $15,000 gets divided by 6 (months). That means you’ll have to save $2,500 per month for your goal.
Either way, this requires steady and sustained financial management for several months. That being said, there are ways to both speed up the process and make it easier.
Here are some tips that many have found useful when building an emergency fund:
Cut some luxuries in order to reallocate the money for them to the emergency fund. Skip dining out for several weeks, for example, and prepare meals at home instead.
Look into obtaining a new source of extra income. That may mean doing part-time jobs on the side or taking on one-off projects that can add to the amount of money coming in. Put the extra income in your emergency fund.
Automate the deposits into your emergency fund from your main savings or deposit account. This makes it harder for you to miss a payment.
If you have credit cards, either pay down debt on them as aggressively as possible or request rate reductions. You’ll struggle to put away money in your emergency fund if you’re also dealing with high-interest debts!
Start budgeting. Working up a budget that includes your emergency fund deposits is a great way to control your expenses better: you may even find yourself saving dollars you never noticed going into unnecessary expenses!
Where to Keep/Invest an Emergency Fund
Okay, now you know how to build up your emergency fund and you know how much should be in it as a minimum.
The next question, of course, is where to keep/invest your emergency fund.
Some of the more old-fashioned out there may ask why they shouldn’t just stick the fund in a shoebox under the bed.
Aside from that being rather risky - the undersides of most people’s beds aren’t very secure - there’s another, bigger reason that’s a bad idea.
You need to protect your fund from inflation.
Inflation increases the prices of products and services over time; in doing so, it also reduces the value of your emergency fund. Every dollar you put in it this year will buy less next year, due to inflation.
That’s why you need to put your fund somewhere it can earn interest and grow steadily to match inflation. This means you should be putting your emergency fund in a bank.
That being said, you can’t expect to stash it in just any bank account and expect everything to go well. Different banks and different deposit accounts have different interest rates - the idea is to shop for the best option.
Essentially, you have several needs when shopping around for a good place to keep the funds:
You need the fund to be separate from your main savings account so you don’t confuse them.
You need the fund to be in account with a decent interest rate.
You need the fund to be accessible enough for emergency withdrawals.
Ironically, you also need the fund to not be so accessible that you're tempted to withdraw cash for non-emergencies on impulse.
There are several good options for that. Let’s go over the first ones that come to mind.
1. Savings Accounts
Again, the general rule here is that higher interest rates are better. However, these savings accounts tend to come with a lot of requirements for you to enjoy a higher interest rate.
For example, DBS has a Multiplier Account that offers a chance to enjoy interest rates as high as 3.8% per annum. The catch is that you have to transact $2,000 or more on eligible categories with DBS/POSB each month.
Still, it’s not a bad deal if you normally do transactions of that amount per month - say, in credit cards, home loan instalments, insurance, or investments. That’s because your transactions are counted across your DBS/POSB accounts.
In other words, you can just focus on depositing money into the Multiplier Account while using another DBS/POSB account for expenses. This allows you to avoid taking money out of the emergency fund.
You see, it’s better for the fund to be in an account that doesn't require you to meet a spending minimum to sustain the interest rate - because you don’t want to spend an emergency fund regularly.
There are a few other high-interest savings accounts in Singapore that use similar schemes. UOB’s One Account (up to 2.50% p.a. interest rates) and OCBC’s 360 Account (up to 2.15% p.a.) are examples.
But if you have no reason to meet the minimum spend required to get the high interest rates on these, don’t bother. It’s also fine to just use the best regular savings account you can find.
Note that one way you can further discourage yourself from spending money in the emergency fund is to hide the card for the account somewhere you’ll rarely see it.
You could even ask your significant other to hide it for you, but only if they’re more responsible in financial matters than you are!
2. Singapore Savings Bonds
Singapore savings bonds are government bonds that let you save and invest for the long term. They represent another good option for emergency fund storage.
For one thing, they’re zero-risk because they’re guaranteed by the Singapore Government. For another, they can be cashed out whenever you like without penalties to accrued interest.
Contrast that to the case for most fixed deposits, where accrued interest is forfeited if you cash out prior to a specific time.
They also allow you to get good interest rates if you let them mature… but only if you let them mature for a decade. Unless you get into a lot of emergencies, though, that should be doable.
New bonds are issued regularly by the government, so average interest rates vary. Generally, though, you can expect returns of more than 2.0% per annum for 10 years.
You can buy anywhere from $500 to $100,000 of these bonds from participating banks. At the moment, these would be OCBC, UOB, and DBS/POSB.
3. Foreign Currency Count
Another option is to keep your emergency fund in a foreign currency account. This keeps it accessible but also offers a slight “road bump” that should make you think twice about withdrawing from it: currency conversion.
Most banks offer an option to open a foreign currency account, so finding a suitable bank for this shouldn’t be difficult.
Take note that there are multi-currency options too - like Citibank International Personal Bank’s offer.
Whatever account you do use, be certain that the currency you’re using is a haven currency, though. Haven currencies are characterised by stability, i.e. their value doesn’t drop much.
The primary haven currencies are the greenback, the Swiss Franc, and the Japanese Yen. Even when choosing from among these, though, check the markets to ensure that a currency is still going strong before opening a foreign currency account.
Emergency Fund vs. Investing:
Why Not Keep It in Stocks?
This is a question a lot of people ask: Why not put your emergency fund in Blue Chip Stocks, which are non-volatile investment options that can also be sold easily?
It’s not a good idea, unfortunately, because stocks are never certain. No stock's price is ever truly fixed, and if you have to sell your stock when the price is down, your emergency funds will no longer be the size they should be.
Besides, mixing your stock portfolio with your emergency fund isn’t good financial planning. If you think of your investment portfolio as part of your emergency fund, you'll be likely to sell it even before you hit your original goals for investing too.
Where to Go for Help Building an Emergency Fund
If you think you still need more help building your emergency fund or figuring out where to keep it, that’s all right. Most people find this process daunting and may need a little guidance.
We can help you get started. Whether you’re having trouble setting aside enough money each month to build up your fund or feeling unsure about which bank to put it in, our financial advisors can assist you in finding a solution.
Contact Financial Fortress for a free, one-on-one financial consultation. We’ll connect you to professionals who can set your monetary affairs in order, identify issues to address, and help you stabilise your economic situation.
With their help, you’ll not only put together a solid emergency fund, but also improve your financial standing. Both of these things can help you move closer to a more secure future. And if you learn how to manage your finances, even financial independence!
Written in collaboration with our financial advisory partners at Virtus Associates.