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Emergency Fund: Why Every Singaporean Should Have It, How Much You Should Have In It & How You Can Start Building One

Emergency-Fund-How-To-Start-Building-One-&-The-Importance-Of-It

The importance of having an emergency fund cannot be overstated. To put things into perspective, the COVID-19 outbreak has rendered many Singaporeans jobless. 

During these tough times, it pays to know that you have an emergency fund kept in place. This ensures that you’ll at least have some spare money to fall back on when things get rough.

What Is An Emergency Fund?

What-Is-An-Emergency-Fund

An emergency fund is an amount of cash set aside to handle unexpected crises such as medical emergencies, sudden loss of income, accidents and other similar occurrences.

You will definitely  have faced some sort of emergency at a point in your life. Having a crisis can paralyze your life for a long time, especially if you had not planned for it financially.

An emergency fund will enable you to ride through such challenges and keep you afloat economically, even in the face of a crisis.  It would be best to make it a priority and to include some savings for an emergency fund in your budget.

Why You Should Have An Emergency Fund

Heres-Why-You-Should-Have-An-Emergency-Fund

Here are some excellent reasons for you to build up an emergency fund.

1. You Are Planning To Get Out Of Debt

If you are working on a plan to get out of debt completely, then it would be best to build up an emergency fund that you can use whenever you have a crisis. It will help you to refrain from taking up any additional debt whenever you have an unexpected financial need.

This way, you will gradually be able to pay off your current loans. Ultimately, you’ll also get out of debt sooner rather than later.

2. You Only Have One Source Of Income

Some Singaporeans have more than one source of income. It helps to cushion them if they happen to lose their primary income source. However, if you have a single source of income, then it will be wise for you to set up an emergency fund.

It will help to keep you afloat if you happen to lose your only source of income.

3. You Work On A Contract, Or Are Self-Employed

Working on a contract basis or being self-employed comes with its unique challenges because the income tends to be uncertain. You might not know if your contract will be extended. Or if you’re self-employed, the risk of having your income cut short is higher.

If you are self-employed in Singapore, you should also set up an emergency fund. This will help to sustain you during seasons when your income is low, and there are urgent financial needs to be met.

4. You Have Recurrent Medical Expenses

If you incur medical bills frequently, then this is another good reason why you should set up an emergency fund. Insurance companies may not necessarily pay off all your medical expenses.

Having an emergency fund will give you peace of mind in cases where you need extra cash to pay for medication or surgery.

5. You Are A Homeowner

If you are a homeowner in Singapore, then it is inevitable that you will incur recurrent expenses for the repairs and maintenance of your home. Apart from the minor repairs done on a routine basis, you may also end up with major unexpected breakdowns in areas such as the plumbing system or even the air conditioning system in your home.

These system breakdowns tend to be rather expensive, and having an emergency fund will help you to resolve them quickly.

6. You Live In A Foreign Country

If you are a Singaporean living abroad, then it is also advisable for you to build up an emergency fund. Circumstances may arise where you need to travel back home suddenly due to a family crisis or any other situation.

The cash in your emergency fund will come in handy in such cases.

7. Build Long-Term Financial Goals

If all the above points do not apply to you, then this should. As a Singaporean, you’ll definitely wish to build your long term financial goals.

Some reasons might include buying a new car, purchasing your new home, saving up for your children’s education or building a retirement fund. These are all great reasons to have an emergency fund in place.

This fund will deter you from depleting the funds in your ordinary savings account. You will be able to build up your finances constructively and achieve the goals that you have in the long run.

How Do I Build An Emergency Fund?  

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After all that’s been said about having an emergency fund, how do you start building an emergency fund?

Here’s how!

1. Determine The Amount That Should Get Channelled Into Your Emergency Fund

As a general rule, you should aim to have an amount in your emergency fund that will keep you afloat financially for six months.

Fixed monthly payments are recurring living expenses that get incurred every month.

An example of these kinds of costs is listed below.

The following is an example of the fixed expenses of a Singaporean:

  • Food and transport $700
  • Electricity and utilities $150
  • Rent $1000
  • Insurance $300
  • Phone expenses $50

From the above breakdown, the total fixed costs add up to $2,200 per month.  In this case, the amount that should get channelled to the emergency fund would ideally be $2,200 x 6 = $13,200. 

However, for those who are self-employed, it would be advisable to direct a total of 12 months’ income into the emergency fund account. In this case, it will be calculated as 2,200 x 12 = $ 26,400.

2. Begin To Make Deposits Into Your Emergency Fund

You should begin to build up your emergency fund while you are still young and earning a good income.

There is more than one way that you can use to start to build up this fund. Here’s how:

  • Using the example given above, if your total monthly income is $4,000 and the total monthly expenses stand at $2200, then this means that there is a surplus of $1800.  The savings of $1800 can be channelled directly into the emergency fund. The result is that at the end of one year, your emergency fund will have a total of $21,600.
  • Another way to build up the fund would be to put in a fixed amount of savings every month. In our example, a figure of $400 could get channelled to the emergency fund every month. At the end of one year, the fund will have accumulated a total of $4,800.  This is a slower way of building up the fund. However, you can also add in cash from any other source of income.

The following are some tips that should guide you as you begin to build up your emergency fund.

  • Ensure that the funds are always in liquid form. Avoid investing in stocks and bonds where the cash may become tied. Only invest in stocks and bonds when you are sure that you have enough for your emergency fund. Make sure that the funds are easily accessible when an emergency arise
  • Be extremely disciplined. Refrain from making unnecessary withdrawals from your emergency fund.
  • Keep a separate savings account for every day financial issues that are not emergencies so that you do not dip into the emergency account.

When Do I Use My Emergency Fund?

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If you choose to utilize the cash your emergency fund, the following are five rules that you need to follow strictly.

1. A Very Urgent Financial Situation

You should only use the cash in your emergency fund for a genuine crisis. An example would be unexpected medical expenses arising from a sudden illness. In many cases, the amount of insurance may not be sufficient to cover the total cost of treatment or surgery. The emergency fund can be useful in such a situation.

2. A Situation That Will Increase Your Debt If Left Unpaid

The emergency fund should get used in cases where failure to settle a particular expense may result in a much higher cost.

A good example would be a credit card debt which tends to accumulate a considerable amount in compound interest if left unpaid. Another example would be the risk of losing a valuable asset because of a defaulted loan.

3. To Improve Your Credit Rating

Having a negative credit rating has many grave consequences. As a general rule, it will be allowable for you to use part of the cash in your emergency funds to settle some debts quickly to improve your credit rating.

4. It Is A Crisis

Several types of disasters may occur. Some examples are the sudden loss of a job or an accident. In such cases, it is allowable for you to withdraw funds from your emergency fund.

5. Ensure That You Replenish The Fund

As you withdraw funds from your emergency stash, ensure that you build it up once again. It is important to note that the cash available in this fund should never get fully depleted because emergencies can occur more than once within a short period.

Strive to maintain the fund balance at an amount that will be sufficient to sustain you for at least six months.

It would be best to get guided by the above rules whenever you need to use your emergency fund.

5 Scenarios Where I Should Use My Emergency Funds

Scenarios-Where-You-Can-Utilise-Your-Emergency-Fund

Here below six real-life situations where the money from this fund can come in handy.

1. Sudden Layoffs Or Job Loss

Unexpected job loss can be very traumatizing. It has become a reality, especially during this season when the world is grappling with the COVID 19 crisis. Although the government has provided us Singaporeans with some financial help, it pays to always have savings, just in case.

If you have suffered a job loss, your monthly fixed expenses will still need to get paid. This is regardless of whether you have an income or not. As you endeavour to look around for another source of income, the cash available in your emergency funds will come in handy to pay your monthly bills.

If you have managed to accumulate a total of 12 months’ income in your emergency fund, then this will be a great benefit.

2. Accidents

Accidents tend to happen at any time, resulting in an untold amount of damage or injury.

In the event of a car accident, boating accident or even an accident within the home, there will be unexpected expenses relating to repairs or even medical treatment in cases where there are injuries.

The cash from your emergency fund will be a big help in handling the unexpected expenses that arise from such accidents.

3. Sudden Illness

A sudden illness can be very crippling for both you and your family members. If it is a long-term illness, then your insurance may not be able to cover the entire cost of treatment.  It may also become expensive if surgery is required.

The emergency fund can get used to pay off some of these unexpected medical expenses and give you some peace of mind.

4. Sudden Breakdowns In The Home

The sudden break down of the piping system or an air conditioner within your home can be a source of frustration.

Many times, it can create a health hazard for you and your family who live within the house. For example, the breakdown of the air conditioning system can cause your home environment to become too hot or too cold.  It is usually quite costly to repair these types of damages. The emergency fund can be useful in financing such repairs and restore a healthy environment within your home.

5. Pet Medical Expenses

If you happen to be a pet lover, then you will understand the costs that are involved in the medical treatment of pets.

When your pet becomes ill, it would be best to seek treatment sooner rather than later. The cost of pet medication and surgery is relatively high in Singapore, and it may not be easy to get insurance to pay for this expense. The cash from your emergency fund will help you to get the proper treatment required for your pet.

Require Additional Financial Help To Build Your Emergency Fund? Ask Lending Bee!

Lending-Bee-Can-Help-To-Build-Your-Emergency-Fund

As aforementioned, there may be situations which might cause our emergency fund to get depleted sooner than expected. In worse case scenarios, you might even need to seek additional financial help because your savings have been wiped out.

How then can you replenish these funds?

Lending Bee provides you with affordable personal loans to help you tide through any financial emergency or crisis that you might be facing. If you’re worried about lengthy application processes and strict loan regulations, fret not!

We strive to provide financial help to those who need them. This is why our online loan application process only takes 3 minutes! Thereafter, we will notify you within the hour whether you are approved for the loan, and if so, you’ll be able to receive your loan within the day!

Ultimately, having an emergency fund is extremely important to ensure that you remain financially stable. Even so when things take a turn for the worst. However, when you require extra financial help apart from an emergency fund, Lending Bee will be happy to help!