Now that we have excess money to invest in, the next step would be to set aside a pool of emergency funds. Like the name suggests, this money is purely for emergency events like buying a new set of clothes for your upcoming date. NOPE, I’m just kidding!
This funds should only be used if it is really really really necessary (accidents, retrenchment etc). Unpredictable events can occur anytime and things could turn bad quickly if we are not prepared for it.
Emergency funds allow us to tide over the difficult period without having to dip into our investments or having to loan from others. Imagine you had no emergency funds and require to sell your investments at a low just to raise funds. How detrimental would that be!
How much should I set aside?
A general rule of thumb would be to set aside anywhere between 3 – 24 months of your monthly expenses. Don’t know how much is your monthly expenses, then you should start tracking!
For fresh graduates that just entered the work force, you could first set aside 3 months of funds and add more as you stay longer into your job.
For those who are more conservative and not so optimistic, you could set aside 24 months. Any amount more than that would not be ideal as there is opportunity cost in the funds that could have been invested to earn greater returns.
Personally I’m setting aside 6 months of monthly expenses.
Where do I store my emergency funds?
Now that you have a sum of money set aside, the funds should be placed somewhere safe and yet earning some interest to combat inflation. Funds should not be invested in fixed deposits, stocks, mutual funds or bonds that does not guarantee your initial capital nor flexibility to withdraw anytime.
If there is ever a need to withdraw your emergency funds, the last thing you would want is to be unable to withdraw your money or received a lower amount than you initially deposited. If you’re thinking of stashing it in milo tins, here’s why you should not.
The only options we are left with are the banks savings account, Singapore Savings Bond, Insurance Savings Plan and probably market money funds like Stashaway Simple, Endowus Cash Smart, Syfe Cash+ that are offered by Robo-advisors. Unless you’re living under a rock, you would have known that interest rates have been dropping.
Summary Of Existing Options (Click on Hyperlink for more info)
- Bank Savings Account: ~0.4 – 0.8%
- Singapore Savings Bond: Average 0.9% for 10 years
- Insurance Savings Plan (Singlife, Gigantiq, Dash): ~1.8%
- Market Money Funds: ~1.5%
Long gone the days where bank savings account and Singapore Savings Bond are offering >2% interest.
Do bear in mind that although insurance savings plans and market money funds offer slightly higher interest, the capital/interest is not guaranteed. Market money funds is still an investment (albeit a low risk one) and is subjected to capital fluctuations that’s why they have to offer a slightly higher interest than bank accounts for the risk you are taking.
How Do I split My Pot
Still undecided on which option to choose? How about having a part of everything. Personally, I split my emergency funds into 2 broad pots.
First pot being my old and reliable DBS mutiplier account. Despite the low interest rate, I still keep it as it gives me the assurance that I can access my funds anytime in the event of an emergency.
Second pot being the Singapore Savings Bond. I was lucky to have deposited my funds 2 years ago when interest rate was still above 2%, so there isn’t much need to touch this. With the recent addition of market money funds, I have a chose Stashaway Simple.
This ‘ladder’ approach allows me to have flexibility to access my funds and yet have some funds working to get the higher interest rates.
Now that you have set aside your emergency funds, next come the fun part where you will grow your money.
Stay tuned to the next post!
Have a better approach to grow your emergency funds? Share it down in the comments below!