Emergency funds are a basic requirement of financial planning, as such Dr Wealth platform actually incorporates an automatic emergency fund calculation.
Why Do We Need An Emergency Fund?
No matter how sound our financial plan is, something can always go wrong which require major expenses. While certain things like accident and hospitalization may be covered by insurance coverage, there are others which do not, for example job loss or disaster.
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How Big Should Your Emergency Fund Be?
A rule of thumb used in the past is 3 to 6 months, which means that should you for example lose your job, you would have enough money to cover your living expenses for at least 3 to 6 months. However, is 3 months really enough to get a new job?
At Dr Wealth, we recommend 6 to 12 months instead, which should be a reasonable amount of time to get a new job with some time buffer. Depending on the industry and your position, you should vary the number of months. For an industry which is tough to get a job, you should probably opt for the maximum. Similarly, if you are at a relatively senior position where it is difficult to secure the same compensation package at other companies, you should set aside more for your emergency fund.
How Should I Manage My Emergency Fund?
Ideally, the emergency fund should be stored in the most liquid assets, such as cash, money market or fixed deposits. They should not be placed in stocks which are volatile and the market may be down when you most require the cash. Similarly, they should not be placed in properties due to the long time period to sell the property and receive the proceeds.
You may place this Cash and Cash Equivalents into Fixed Deposits to earn interest while still preserving the ability to liquidate without losing any value of the principal. We recommend that you place them in staggered fixed deposits.
I.e. 6 months FD will require 6 equal amounts which will mature every other month.
12 months FD will require 12 equal amounts which will mature every other month.
This ensures that will be deposits maturing every month which can be used or rerolled back into the FD cycle.
About the Author
Calvin Yeo is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform. He is also a Chartered Financial Analyst (CFA) as well as Certified Financial Planner (CFP).
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