With so many things that are changing and happening with COVID-19, we might have shrugged off our financial worries and tell ourselves “Worst comes to worst, just eat grass lor”
But of course, we all know that it is a casual joke of ours but also realizing that unexpected things do happen! No one would have expected the economic downturn with the strike of a pandemic. But if there’s something we could learn from this, it is to prepare ourselves for the unforeseen. And this is the reason why an emergency fund might just be as important!
What is an Emergency Fund
Emergency fund for instance is the money that you might need to tap into when unexpected events happen. This may be due to a loss of job that greatly affects your income or big, unexpected expense tickets such as a car repair or large medical bills that need your attention.
These funds should be separated from your regular savings. How so? Savings are money that you might have set aside for a particular goal, like a travel trip or the new laptop that you have been eyeing on. These are money that can be tapped on to make purchases on your wants.
Emergency funds on the other hand should be separated and to only be used to cover your unexpected expenses unlike the ones in your savings
Why Do We Need an Emergency Fund?
We’ve heard so much about the importance of setting up an emergency fund but is it necessary?
We might think that our savings might be enough, or we have insurance to cover our medical expenses if need be. However, we fail to realize that even with savings or insurance coverage, we will still need to make the initial payments before our claims can be reimbursed to us.
In addition, having an emergency will also allow us to focus our savings purely just for the goals that we might have set and not to worry about our savings being depleted substantially in unforeseen cases.
Building an Emergency Fund? So, you’ve realized the importance of setting an emergency fund? Great! Here are some of the key points that could guide you in this journey!
1- How Much to set aside?
So, the big question. How much is enough?
This is interesting because a search online will tell you that as a rule of thumb, the emergency fund should be able to cover 6-12 months of your monthly expenses.
However, in our opinion there is no fixed formula to stick with, but minimally having 6-12 months of expenses covered will allow you time to recover and get back your financial stability in cases such as a loss of jobs or big when expense tickets were to be made.
2- How Should I Start Building One?
Now that you have a clearer idea of how much emergency fund you need, you may wonder how you should go about building one.
To start off, building an emergency fund from scratch can be really overwhelming, especially seeing a number that is 6-12 months of your monthly expenses. However, just like saving for a big goal, consistency is key. Building up an emergency fund can start off with contributing 10-20% of your monthly income and increasing it as your earning power increases.
If you have been investing or saving for a big ‘want’ purchase, you may want to reconsider putting them on hold while building up on your emergency fund first. The future you may just look back, thanking you for this!
3- Where Should I be keeping my Emergency Fund? As we have shared that these funds should be separated from your investments and savings, some of you may wonder where a good place will be to keep these funds. Will a regular savings plan be a good place to put these funds in or will an insurance savings plan work?
The one key point to note is that these funds should be made easily accessible to you at any time as it is used in unforeseen circumstances. However, you will also want to have these funds somewhere that can cover the cost of inflation.
If you are looking for the best place to put your emergency fund, it should be highly liquid which allows you to tap on them at any moment but at the same time pay you a small sum of interest.
4- When can I use these funds?
Now that you may have an emergency fund all set up, one of the last points to note is when you should be using these funds.
For those of you wondering, NO, the latest iPhone or a new pair of sneakers doesn’t make the cut. No matter how much of a good deal it might be.
Before dipping down on our emergency funds, here are some questions you can ask yourself before deciding on whether to use your emergency fund.
a- Is it a Want or a Need?
Getting a new laptop for work because the old one is broken versus a new laptop for an upgrade are two different things. The latter should be funded by your savings and an emergency fund should only be used to cover the expenses when your daily life will be greatly affected.
b- Is it an urgent or unexpected situation?
Saw a last-minute sale of a flight for your ideal trip? That is not an unexpected situation! Yes, it was a surprise sale but an unexpected situation here is something that you have no control over such as a loss of job or an accident that requires you to pay for your accident expenses.
c- Can you live with a lower emergency fund until you replenish it? Maybe you have answered the previous two questions and it all ticked the box to tap into your emergency fund. Finally, ask yourself whether you can live with a lower emergency fund after making this expense. The last thing we want is to use most of it today only to need it tomorrow.
Yes, your laptop might be broken, but do you need to get the most expensive one with your emergency fund? Maybe you can go about just getting a cheaper one before upgrading it in the future.
Still in Doubt? Having an emergency fund makes you ready to deal with all the surprises that life decides to throw at you, so don’t delay getting it started especially while you are still healthy and earning a regular income. We might have briefly covered some of the points on setting up an emergency fund, but we understand that everyone’s financial situation may be different and the journey setting up an emergency fund may not be as simple as it seems. However, we are always here to help! Still in doubt or unsure on how to go about planning for your finances?
C x D Learning about financial literacy can also be fun and easy ! Stay with us in this financial journey one post at a time to find out how ! If you haven’t already, you can check out our other work down below too, happy learning and reading !
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