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Importance of Emergency Fund

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In my previous posts, I have written about the need for Opportunity Fund, which is meant for investing purposes. In life, we should also consider building up an Emergency Fund, which is a reasonable amount of money set aside for rainy days.
Many people live their lives as if nothing bad will ever happen to them. It is as if buying a car and not buying an insurance, expecting no incidents or accidents. Such a thinking is so unrealistic as we know that life has its share of downturns. Without an emergency fund, any setback might potentially spiral into serious financial problem for you and your family.
An Emergency Fund is considered more important than Opportunity Fund as the former is a safety net and is deemed as the shock absorber of life. Without Emergency Fund as your cash cushion, you are taking a gamble. I believe we should build up an emergency fund as soon as possible because the fund gives us time to adjust without drastically altering our lifestyles.

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Although many people are convinced that an emergency fund is necessary, many still procrastinate building up such fund. Common complaint is that the money would be sitting in the bank and not fully utilized. Majority of the people also think that they can borrow against credit cards or credit lines.

If you are gainfully employed, there is no doubt that you can easily borrow money from the bank. However, if you are retrenched, getting access to credit is going to be difficult.

How much to save?
The perennial question most people ask is how much do we need to save for emergency fund in order to effectively see through a major emergency or crisis. My thinking is that if you are single and have no dependents, S$10,000 or 4 months of your salary is sufficient for a start.

Of course the more you save, the more you are cushioned against the misfortunes of life. For those with families, $50,000 or a six-month buffer should be the minimum. This will provide a reasonable safety margin for you and your loved ones. However, if you have a lot of dependents (kids and parents) or if any of your dependents is in high risk health category, then of course you need to save more.

Another aspect you need to consider is how quickly you can find alternative employment. For example if you are trained as a nurse and as nurse are in big demand in Singapore, then your financial safety margin requirement is low. On the other hand, if you have a specialist job such as an engineer in a wafer fabrication plant in Singapore, there may not be another similar job waiting for you if you are retrenched.

The key benefit of a job safety margin is that it gives you time to look for a job without forcing you to settle for something less. My point is: if your job is really that specialized and you are the sole breadwinner, your emergency fund should be enough to last you for at least 9 months.

Safety and protection
Your concerns for your emergency fund should be on the access and safety net it provides. Don’t worry about returns, inflation and exchange rates as you must remember the purpose of this fund is not for investment purposes. Its purpose is not to generate returns but to provide insurance to protect you against life uncertainties.

Your ability to build up such fund depends on your discipline in adding to it on regular basis, and your ability to resist spending it for non-emergencies. There is no secret to saving and neither do you need special strategy. The key is to start saving right away and stick to it resolutely.

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1 Comment

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  1. Great article. Emergency funds are a smart financial decision even if you have a stable job for cushioning the blow of unexpected expenses.

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