Definition of Emergency Fund: An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards, as a last resort. Source: Investopedia
When to Start an Emergency Fund?
As earlier as possible? As soon as you start earning? Horlic: Start it from today! Never try to practice the altitude of ‘wait and see how’, time flies fast, seriously! Move your first step and just do it!
Even if you are a student, start saving for your emergency fund, too. That will be so great when the time you graduate with the fund ready in your bank account, which means you are moving faster than others by moving forward to the next stage in financial planning.
How to Build an Emergency Fund?
Saving first before spending. Once you have received your monthly salary, do allocate certain percentage of your income into emergency fund before start spending it. No shortcut! You need to train yourself to be disciplined.
Where to Keep Emergency Fund?
For me, I put the first month of my emergency fund into savings account, so that I can withdraw money whenever I need it.
The allocation for second month will be saved into the highest interest rate fixed deposit (FD) at 1-month tenure to ensure the liquidity on withdrawing my cash; meantime, I earn better interest rates from FD compare to normal savings account.
For those who plan to save more than two months for the fund, you may consider putting your money into others low risk and high liquidity investment vehicles like unit trust, bond, or money market fund etc. as long as you understand well on the investment.
How Much of Emergency Fund Amount Do I Need?
I will say minimum 2 months, or 3 to 6 months is better still. For myself, I’m working hard toward to build my emergency fund, which is sustainable for 12 months based on my current risk profile and uncertainty in global economic outlook.
In fact, it is very much depending on individual situation. Maybe we can put it in this way, try to ask yourself:
- How fast and how confidence are you to get a job if you lost your job during economic crisis? Or
- Is there any backup can be considered from your family members (eg: parents or siblings) if anything happen to yourself, which might affect your income?