No one ever wakes up in the morning and anticipates getting into an accident in the afternoon. That’s why it’s called an ‘accident’. You’ll never know when you’ll end up in an emergency such as a punctured tyre, a car breakdown, or even getting sick that month. Like it or not, unfortunate events like these are inevitable, and that means you’ll have to skip out on a few yum-cha sessions with your friends and it may even knock you into unexpected debt. That’s why you need an emergency fund. An emergency fund is supposed to act as your financial safety net to cover unexpected expenses. In this article, I’ll explain to you why you need an emergency fund and how you can get started on building one.
What is an emergency fund?
An emergency fund is a sum of money that is set aside to pay for unexpected expenses such as unforeseen car repairs, medical expenses, or unemployment. In Malaysia, the Employees Provident Fund (EPF) suggests that you aim to save three to six months worth of your salary as an emergency fund. Depending on your financial responsibilities, you could save more.
Why You Need an Emergency Fund
1. It Gives You Financial Security
An emergency fund provides a buffer between you and financial disaster. Whether it’s a sudden job loss, medical emergency, or major car repair, having a stash for times of need can prevent these events from becoming financial crises.
2. Reduces Your Financial Stress
Knowing that you have money set aside for emergencies can significantly reduce stress. Life is unpredictable, but having an emergency fund can help you sleep better at night, knowing you're prepared for a rainy day makes a world of difference in your financial journey.
3. Prevents You from Going into Debt
Without an emergency fund, you might end up relying on credit cards or loans to cover unexpected expenses. Eventually, this could lead to high-interest debt, making your financial situation even more challenging. An emergency fund protects you from falling into this debt trap.
4. You Won’t Need to Rely on Others
Having an emergency fund means you won’t have to be financially reliant on others in times of crisis. You won’t need to borrow from friends, family, or financial institutions, which can help maintain your independence and financial health.
How to Start an Emergency Fund
1. Set a Goal
First, figure out how much you need to save. You can start by using a budget planning spreadsheet to calculate your monthly expenses. Make sure to include your rent or mortgage, utilities, groceries, and any other necessities, and multiply by the number of months you want to cover.
You can check out this video we made on how to use a budget spreadsheet.
2. Keep Your Funds in a Separate Account
Next, you’ll want to keep your emergency fund separate from your regular checking or savings account. Much like the concept of "out of sight, out of mind," the goal of this is to keep you from succumbing to the temptation to spend the money on non-emergency expenses.
A smart way to store your money is in low-risk, highly liquid investments such as money market funds like TNG Go+, StashAway Simple, or Versa Cash. These offer daily returns to help your emergency fund grow over time.
3. Start Small and Be consistent
If the idea of saving several months’ worth of expenses seems daunting, start small. Instead, set a realistic initial goal, like RM1000, and gradually increase your contributions as your budget allows. Reaching your savings milestones will give you a positive boost of momentum and keep you on track with your savings.
Set up automatic transfers from your main account to your emergency fund. This way, you’re consistently saving without having to think about it.
4. Use Windfalls Wisely
Unexpected windfalls like tax refunds, bonuses, or gifts can provide a substantial boost to your emergency fund. Rather than spending them impulsively, prioritise depositing these funds directly into your emergency savings to strengthen your financial safety net.
5. Review and Adjust Your Contributions
Periodically review your emergency fund to make sure it’s still sufficient for your needs. As your life circumstances change—like getting a raise, moving, or starting a family—you may need to adjust your savings goal. Eventually, when you’ve saved up enough, you can start redirecting your cash into investments.
6. Maintain Your Emergency Fund
Maintaining a healthy emergency fund is a cornerstone of sound financial planning. Remember that your emergency fund should only be for real emergencies and not for “emergencies” like buying a new phone or going on an unplanned trip. It’s also a good habit to always replenish what you use. If you do need to dip into your emergency fund, make it a priority to replenish what you used as soon as possible. This will ensure that you’re prepared for any future emergencies.
Conclusion
Starting and maintaining an emergency fund might seem challenging at first, but when you start setting attainable milestones, it’s a lot easier to follow through so you can build a solid financial safety net for yourself. While you can’t predict the future, you can definitely prepare yourself for it. By taking the necessary steps to build an emergency fund, you’re also investing in your peace of mind. So start small, and stay consistent, and you’ll be ready for whatever life throws your way.
Subscribe to our financial newsletter for the latest news, insights, and advice on personal finance, investing, and more. With every email, you’ll gather the confidence and knowledge to make informed decisions to achieve your financial goals.
Comments