[9 August] Emergency Fund: How Much is Enough for Me?

Picture this; you are walking leisurely on a beautiful morning when suddenly, a car speeds through a big puddle and splashes you with water. You are now drenched from head to toe. It is a simple illustration how sometimes we find ourselves having to deal with these little “surprises” that life brings us. 

😱 Preparing for life’s surprises

As we now know, life is full of surprises. Sometimes they are good ones like random cashbacks when you purchase groceries, winning a lucky draw, a new family member in 9 months’ time or some rambutans from your neighbour. Other times, the surprises may not be as wonderful such as your motorbike breaking down, unforeseen medical bills or the loss of loved ones. So how can you financially prepare for these adverse surprises? 

The secret is to prepare an emergency fund. We will share with you a few ways to build your emergency fund so you can confidently weather through the curveballs that life may throw at you:

• 🤔 Figure out how much money you want to set aside towards your emergency fund.

How do I know how much I need to save, you ask? The rule of thumb is to at least have 3 to 6 months’ worth of expenses in savings. So, calculate your monthly essential spending (i.e.: rent/mortgage, groceries, bills, etc.) and multiply that by the number of months you want to save for.

If you need some guidance, there are many emergency fund calculators online that can tell you how many months’ worth of expenses you should prepare for given your income level, commitments, number of dependents, etc. One that we can refer to is MyPF Cash and Emergency Savings Quiz to get you started.

💡 Pro Tip: If this is your first time creating an emergency fund, we advise that you start by saving towards one month's expenses first and build your way up. 

• 🧐 Where should you store your savings?

The majority of us have one savings account for everything. Our earnings, expenses, savings, children education fund, pocket money, etc. But as you might have learnt the hard way, you ended up constantly wondering where did your money go to and most of the time, you have nothing left to save. 

The first order of business is to separate your savings from this existing account. You can store your savings in: 

📱 Digital tools such as a savings or micro investment app  

🏦 Open a new savings account at the bank 

💹  Put your money to work by investing in Amanah Saham Berhad (ASB) or any other low risk funds.

💡 Pro Tip: Make sure the savings tools you use is capital protected and PIDM insured. Another consideration you need to take into account is how long it will take for you to withdraw your emergency fund - try to find one without any lockup period. 

• 🤑 Make savings fun for you!

Research shows you get a dopamine hit (dopamine is the “happy hormone”) when you pay or spend on something. So, instead of trying to fight the urge to spend, pay yourself by spending your money on deposits into your dedicated savings account or investments. When you do this, it will give you the same happiness hormone release in your brain because it feels like you have purchased something. And the best part is, you are spending on yourself!

💡 Pro Tip: You can schedule deductions on a weekly or monthly basis towards your emergency fund. This way, you can immediately spend on yourself first before spending on other things. 

• 😎 Personalise your emergency fund

The “sufficient” amount for your emergency fund may differ from others. Be mindful of how the savings amount may change over time. Let’s say you have a new child on the way, or you are about to switch jobs, then your “sufficient” emergency fund may be higher than what you currently have. 

Also, bear in mind that you don’t need to have a sizable emergency fund right away. You can work towards it slowly. Just make sure you put in consistent effort towards achieving your savings goal. 

Now you have the tips and tricks to better prepare you for financial challenges that life may throw at you. Working towards building an emergency fund is only the first step. Once you have successfully accumulated this fund, use it wisely. Like the name suggests, only spend it towards actual emergencies. And no, that new gaming console is not an emergency.