There was a time before the COVID-19 pandemic when income was stable, job opportunities were abundant, life was like riding on a cloud over the rainbow and emergency funds seems and even sounded ridiculous.
For many of us, well, especially young working adults, the above statement seems quite true.
Things were going fine for a moment until emergencies happen – like the COVID-19 outbreak. That was one major emergency that most of us weren’t prepared for. The outbreak has resulted in a large number of people getting laid off and caused an economic shock three times worse than the 2008 financial crisis.
Now you’re most probably thinking “The worst is behind, vaccines are being developed and life will be back to normal soon”. But what if soon did not come soon enough?
The Covid-19 outbreak was just a major example of emergencies that could happen, there are minor ones too, like car accidents or you falling down the drain that could cause a major setback to your financial well-being.
So, what can you do?
Well, this is pretty obvious – start an emergency fund!
Wait, what is an emergency fund? Tell me more!
Emergency funds are basically assets, especially money that you can easily access whenever an emergency arises. Easily accessed in this case means they need to be easily transferred, withdrawn, or used to make a payment at any time.
How do you start one?
For starters, whenever you have received your monthly pay, you could transfer a small amount into your emergency savings account. Based on your personal expenditure, this amount could be as little as $50 and as you get better at saving, you could also slowly increase this amount.
If you’re someone who spends most of your income, try reducing some unnecessary expenditures – like that daily Starbucks Frappuccino.
There are also bonuses and lucky money (Like when your favourite aunty suddenly transfers you a few hundred dollars to splurge on yourself). Before spending all of them on yourself because “you deserve it”, putting them into your emergency fund could be a more responsible choice.
How much do you need?
The general answer that you’ll get is usually 3 to 6 months’ worth of expenses.
The original notion was to have your emergency fund keep you afloat in case you lose your job. But based on the current economic realities, it would be better to have 8 – 12 months’ worth of expenses saved up.
Let’s start small first – a 3 month’s emergency fund. Assuming that you spend $1500 on regular expenses (this would include only necessities like rent, food, insurance, etc), you would need to build an emergency fund of $4500. Moving up the ladder would be 6 months, which would put you at $9000, 8 months at $12,000, and 12 months at $18,000.
That was just a random example. A family with children would likely need a larger emergency fund, and someone living with their family could have a smaller fund. Each individual’s financial needs vary. So, make sure to list down your expenses and fine-tune your emergency fund accordingly.
Where to keep your emergency fund?
Somewhere easily accessible – think liquid, like your bank’s savings account. The reason we want this fund to be as liquid as possible is because emergencies could occur anytime and we want you to be as ready as possible when they strike.
Essentially, we’d recommend a savings account that’s separate from your checking account so you won’t accidentally spend the money for discretionary purchases.
Starting an emergency fund might sound intimidating, but not having one is even worse – it means that you’re not well prepared to face any emergencies at all. The recent Covid-19 outbreak has taught us the importance of having emergency funds and how unprepared many of us were.
Take some time to understand your expenditures and learn how to set aside a small amount of money for your emergency fund. We believe that with consistency, you will slowly be able to build up a substantial amount in your emergency fund.