Why Each Singaporean Needs An Emergency Fund & How Much Should Working Adults Have?
While an emergency fund is an essential component of personal finance, the reality is that several Singaporeans do not have one. An emergency fund refers to an amount of money purposefully set aside to cover the costs linked to challenging financial periods such as unexpected job losses, injuries, and accidents.
Unprecedented problems might occur when you’re unprepared, causing you to suffer financially.
Unforeseen circumstances can not only change lives but are costly as well, which leads to significant financial implications. Emergency funding provides you with the financial cushioning you need to cater for expenses for you to be able to minimize dependency on credit cards and loans to handle the short-term shortage of cash.
You might consider the role of insurance in these types of situations if you have coverage for various financial emergencies. It would be an effective way to cover most of your medical bills. However, you may end up in unexpected predicaments that lead to a loss of earnings or require extra funding for living expenses.
All Singaporeans are encouraged to prioritize emergency funding when saving and investing for the future.
Setting Aside Money In An Emergency Fund
Emergency funds should ideally be able to provide sustenance for six months in instances where you are not working. You can begin with three months’ worth of savings if you are newly employed.
Every month, you need to consider:
Food and transportation – $500
Phone bills – $40
Utility bills – $90
Insurance – $400
Home loan – $800
Total – $1,830
With the above figures in mind, a sufficient emergency fund to sustain a working adult for six months would be $10,980.
It is advisable for individuals who are self-employed or have some unpredictable income to save 12 months’ worth of living costs since it can be hard to determine what your monthly income will be when unexpected events arise.
Building An Emergency Fund For Yourself
Cash flow is undoubtedly among the significant challenges that stand in the way of building an emergency fund. This happens in Singapore and anywhere in the world. Factors such as your income, debts and liabilities affect how quickly you will be able to make it.
It is essential to save surplus amounts when you are still earning a substantial income and are in good health. Setting this money aside for an emergency fund is certainly more essential than purchasing a luxury item.
With some basic arithmetic that involves deducting your liabilities from your income, you can figure out how much additional cash flow you have each month. For example, if you earn $3,000 and spend $1,830 living expenses, the extra cash flow will be $1,170. You may opt to use your excess money to eat out daily or set this sum of money aside for your emergency fund.
Being financially responsible by committing to saving extra cash will enable you to reach your goal of the amount you need within a few months. Even building slowly with smaller contributions of $200 each month is preferable to not having any emergency funding. Anything is better than nothing.
- To speed up the process, you can consider reducing your expenses further, increase your streams of revenue or set up a small business that you can run from home.
- It may not be easy to build an emergency fund, but you should not avoid taking the first step because this paves the way for financial independence.
- You can embark on the journey gradually by starting small with a couple of thousands and increasing the amounts while rewarding yourself when you achieve your goals.
When Do You Use Your Emergency Fund
Inflation is a reality for Singaporeans who are aware of the rising cost of living.
That may make you sceptical about keeping your emergency funding in a regular savings account. Although a savings account does provide fantastic interest rates, you need a liquid emergency fund that is easy to access when a problematic situation arises.
However, you should not misuse your emergency und as you risk depleting it and lacking the finances you need when an emergency occurs.
Setting up another savings account aside from your regular one is a good idea that enables you to keep away some money to prevent you from dipping into it. Since this type of account will not be useful for salaries and spending, it should be reasonably easy to get more interest.
Although investing is essential, an emergency fund is a liquid and separate option. When you reach your goals, you can reduce the amount that you set aside towards your emergency fund and begin investing.
Top 5 Rules For An Emergency Fund In Singapore
1. There should be a savings goal
You need a specific savings goal that you can aspire to achieve. It is not enough to tell yourself that you are making an effort to save money. Set a realistic and nominal savings goal regarding your emergency fund and work towards it.
A goal is essential for ensuring that you stick to your savings plan and make sure that you are accomplishing the task of saving as much as you need to reach your goal. This type of financial goal keeps you on-track and motivated.
2. It should only be a necessity
An emergency fund should only get used for an actual emergency. You can determine whether the thing you need is necessary by considering the effects of not making a payment. If a situation may lead to legal problems, endless contact from debt from collectors, or going bankrupt, you can use your emergency fund.
3. Not paying will end up costing you more
The longer you take to pay off credit card debt, for instance, the more costly it becomes, which can happen very fast due to compound interest. Credit card interest rates are notoriously high at 25% per year.
Waiting for a few months may cause your debt to snowball, becoming an emergency. Under such circumstances, paying it off is a crucial step even when it takes out a large chunk of money from your emergency fund.
4. It will lower your credit score
It can be quite hard to recover from bad credit. You should use your emergency fund to prevent you from defaulting on a loan or getting deeper into debt.
5. It is unforeseen and urgent
An emergency fund should only be used for immediate and unexpected events because you did not have enough time to prepare for it. Examples include losing a job due to COVID-19 or a car accident.
6 Real-Life Situations That Need Emergency Funds In Singapore
1. Car Accident
Touch wood! Getting involved in a car accident usually means that there will be repairs that require money. The cost of car repairs and making necessary mechanical adjustments varies. It can run into thousands of dollars if the situation is complicated.
2. Medical Emergency
Nothing is more important than health. If you encounter the additional challenge of a medical issue during a difficult time, such as taking leave from work after an accident, you will have to pay for treatment before insurance sorts you out.
When your income is adversely affected, and you need checkups, treatment, and medicine, an emergency fund can be an effective solution.
3. Losing Your Job
Losing a job or being retrenched due to the COVID-19 situation is an awful reality for many people. You might be fortunate enough to get another employment opportunity soon, but most people do not work again for months.
With the current economic situation that has resulted from the COVID-19 pandemic, getting another job can take even more time. Despite not having an income, you still have financial obligations that an emergency fund can cover.
4. Unexpected Household Issues
Many homes are sturdy and can last for a lifetime. However, various disasters can result in unforeseen maintenance requirements. Problems such as flooding and fires can end up being much more expensive than you anticipated.
5. Pet Surgery And Care
People who have pets consider them to be a part of the family. No one wants to give up on a pet because of unaffordable medical bills. There are different issues you may not have expected that affect your furry friend’s health. Surgery can cost thousands of dollars, depending on how severe the problem is and how much time the vet needs to operate.
Serious illnesses such as heart disease and cancer can cost as much as $20,000. With limited insurance plans available and upfront payments, an emergency fund can be useful for safeguarding your pet’s health.
6. Shotgun Wedding
When you need to plan a wedding suddenly due to various reasons such as getting married before your baby is born, a beautiful wedding ceremony can cost as much as $50,000. An emergency fund can help to ease the pressure of paying for a memorable event.
Knowing exactly how much you need for emergency savings depends on factors that include how risk-averse you are, the stability of your source of income, and the financial obligations you have.
Significance Of Emergency Savings For Working Adults
Having an emergency fund is a way to manage risk. You may get retrenched, which is happening more often as a result of situations like the COVID pandemic. It may take a long time before you get another job.
Several unexpected things can occur in life that can get handled well when you have an emergency fund. With sufficient savings, you will also be able to make a timely decision to help someone who is facing financial difficulties.
Calculating Expenses – Removing Unnecessary Spending
While it is helpful to have a particular number of months worth of savings kept away, it is essential to observe your fixed monthly expenses and to stash away the excess as an emergency fund.
There are expenses that you must spend on to avoid dire consequences such as utilities, your phone bill, transport, food, and insurance premiums. When calculating your monthly expenses, remember to factor in annual items that you pay for, such as car insurance, road tax, insurance premiums, and income tax bills.
You may also need to determine whether you want to cover expenses such as gym membership that is important for your physical and mental wellbeing when unfortunate circumstances arise.
Depending on how stringent you want to be, you should have a minimum of 6 months worth of your expenses kept aside and more when you are self-employed, or a significant component of your earnings is variable. You may need more to get you through an extensive period of minimal cash flow.
Being Prepared For The Future
Before dipping into your savings, you should ask yourself whether the purpose of using your emergency funds is a real emergency and if you will be comfortable when your emergency savings are lower when you are topping up the fund. Are you able to get the money you need?
You do not want to use a lot of money today and end up needing it the next day. You can establish rules in advance and hold yourself accountable.
Examine your expenses regularly as your needs and lifestyle may change. Your emergency fund goals should change accordingly. Another critical time to review your savings is when you get a bonus because this is not cash that you were planning for, and it will make it easier for you to set aside a particular amount each month.
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