Why we need to have Emergency Funds

Lately I’ve been thinking about my emergency fund.

To most people, emergency fund means having a pool of cash to fall back on in case anything bad happens, such as to tide over a job loss, or to pay for unexpected medical bills. Besides saving for “bad” emergencies of cos, an emergency fund is useful even when our life is a bed of roses. (I don’t like to just focus on negative things).

Here’s why:

– you decided that you have enough of your boss and fire him/her. You can use your emergency fund to travel for awhile before looking for a new job.

– you decided to have a career switch. For people around me, most are already holding senior executive or mid management positions. We used 6 – 8 years of our lives to build up our existing careers, but we may realised it’s not what we actually wanted and decide to make a complete career switch, where we may have to start from the bottom all over again. We may then need to use our emergency fund for the short fall in salary.

– being a woman, it’s common to leave our jobs to care for our kids especially when they are still young, or at least for the first few years. Imagine you and your husband do not have an emergency fund and both your salaries are needed to fund your family expenses. You’ll be caught in a situation whereby you want to take full time off to take care of your kid but can’t.

– having an emergency fund also means that you can grab hold of any opportunity that comes along, like setting up your own business, or buying more equities during crisis time (50% sale!). While some may argue that we have our opportunity fund for that, sometimes, such funds are already being fully utilized and an emergency funds serve to step up on our exposure to such opportunities.

Now, where do you save your emergency funds? For me, majority of my funds are in a UOB Fixed Deposit account, and the rest in a UOB saving account. It is advisable to keep your emergency fund liquid so it’s best to save it in a Fixed Deposit account, or a saving/current account where you can have easy access to.

So how does one determine how much emergency fund to have? One friend suggested 6 months’ worth of salary, and another recommended 12 month of living expenses. After giving this piece of information some thoughts, I’ve decided to use the higher of 6 months salary, or 12 months living expenses, just to be on the safe side.

Unknowingly, I’ve been saving aggressively (I saved about 45% of my salary last year), and now have up to more than 12 months of living expenses up my sleeve. It’s time to step up on investing and I’ll move the excess funds into my opportunity funds for investments whenever the opportunity arises. I’ll also stop contributing my monthly savings into this account and to channel it to my upcoming Europe trip in Sep. Yay honeymoon!

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3 thoughts on “Why we need to have Emergency Funds

  1. Hi Jasmine,

    Good post thanks! Yes I would definitely advocate 12 months of expenses as a buffer as you never know when you need the cash. Contingencies and emergencies do crop up from time to time – it’s part and parcel of life.

    One thing I don’t recommend though is keeping it in an FD – that’s because if you urgently need the cash then it takes time to uplift the FD (usually a day) plus you lose all the interest accrued! I keep my emergency funds in CIMB Starsaver account which yields 0.8%/annum. Most FD these days (yes including the so-called step up ones) will give you around 1% to 1.5%, and some tout 2% (a certain DBS)….but there are so many terms and conditions attached it could fill a law textbook! The good thing about CIMB is that it is liquid and there are very few conditions attached, unlike the more onerous banks.

    Emergency funds are more for tiding us over bad or tough times, rather than for investment; so I don’t fully agree with that point. These funds can be used for job losses during bad economic times, pay cuts, sudden expenses (accident and emergencies), illnesses or various other exigencies. I think what you are referring to is an “Opportunity Fund” which is over and on top of the emergency fund. So if you have say $50,000 and your emergency fund is say $24,000 (12 months of expenses of $2,000/month), then you will have opportunity funds of $26,000 ($50,000 minus $24,000). That is how I compartmentalize my monies.

    Hope this helps!

    • Hi Musicwhiz,

      Thanks for recommending the CIMB Starsaver account! Good thing my FD account is maturing end Apr, so I’ll be able to move my funds to CIMB then. Yeah, I’ve heard of those step up accounts too, did some calculations on excel as well but also find too many strings attached to maintain them!

      I do segregate between emergency fund and opportunity fund. However, I’m just wondering what should one do when our opportunity fund is insufficient to take advantage of opportunities when they arise. Say for example Kep Corp selling at $5.20 during crisis time and I bought 5 lots of it, fully utilising my opportunity fund. Following that, Boustead went on sale at $0.40 per share. Wouldn’t our emergency fund be useful in that case to take advantage of further opportunities? Just wondering…

      Cheers!
      Jasmine

      • Hi Jasmine,

        When it comes to opportunity funds, and during a bear market, we should use with caution. The psychology during a bear market is quite different from what we are experiencing currently (when valuations are fair), therefore suffice to say that when it comes to navigating a bear market, things are never quite as simple as they seem.

        First things first, emergency funds are simply that – for emergencies. To dip into an emergency fund just for the sake of buying shares which are on sale puts you into a rather precarious position, as you would not have sufficient funds to dip into during a real emergency (e.g. medical emergency). Hence, I always stress the importance of maintaining that minimum buffer which is reserved for personal use, rather than for investment purpose. Second, there are exceptions of course if you really wish to dip into that stash – to be honest I did that during the 2008-2009 bear market after asking for special permission from my wife in order to purchase additional shares, but ONLY if you ensure you have a stable job which can continue to pay your salary and enable you to top up the account back to the 12-month level of expenses.

        Another thing to note is that during a protracted bear market (or what people think will be a protracted one, since you never know when USA is going to turn on the tap and flood the world with QE), is that you need to constantly and consciously control your purchases of shares. In a bear market, trust me everything looks attractive; in fact you have to differentiate between the weeds and the flowers which have been temporarily downtrodden (but that’s another story), and even if you decide to purchase you have to do so in steps. This is the reason I was not more fully invested during the bear market – because as you pointed out cheap may always get cheaper, especially if you encounter a bout of capitulation.

        So the lessons here are – apportioning sufficient cash for regular purchases at opportune times, and ensuring you have sufficient buffer in case of emergencies. This is all the more important as lousy economic conditions usually do lead to mass layoffs and salary cuts in many companies!

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