As the saying goes: Life is like a box of chocolates; you never know what you’re going to get. In order to weather any challenges that might come your way, you need to plan for the unexpected. This is why you should start saving early for an emergency fund, to tide you through rainy days and help you maintain your usual lifestyle through life’s ups and downs.
Words by Budget Babe
As healthy young adults, many of us often think we’re invincible. Emergencies? Disasters? Nah, won’t happen to us. Even I am guilty of this. But today I feel the need to inform people the crucial importance of having an emergency fund, even if you don’t think you’ll encounter any “emergencies” anytime soon in the next few years.
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Why you should have an emergency fund starting NOW
1. You might lose your job or want to quit
Frankly speaking, we’ll never know what might happen next. For our age range, the most likely possibility would be losing our job. Or even resigning from our job (which was what I did) and having to tide through a period with no employment.
I worked for a pretty screwed-up company. They recently had a mass firing exercise during which many of my then-colleagues lost their jobs almost overnight, including my good friend from university whom I had recommended into the company when I got the offer back then. Some of them have yet to land another job. Without an emergency stash of cash, how do you tide over this?
Or what about if you decided you wanted to quit? For me, I am so incredibly thankful that I was able to spot the warning signs and left the company at my peak…before things started going downhill. As I already had 4 months of emergency savings at that point, I felt secure enough to quit and go a few months without a job if I was really unlucky. Fortunately, I was offered another job before I quit, so I didn’t have to tap into my emergency stash at all.
2. Sudden hospitalisation / Your pet or family member needs surgery
I’m not sure about you guys, but my parents are fairly old and pretty soon I’ll have to face the very bleak reality of worsening health and hospital visits. In fact, my dad has already been hospitalised at least 3 times in the last few years, and he has plenty of chronic long-term conditions including high-blood pressure and diabetes. Unfortunately, he did not buy into as much insurance as he should have, and it’s too late now due to his age. Thus, for me, my father is my main concern and worry that I might not have enough cash should he need hospitalisation in the future.
My friend was hospitalised suddenly 2 years ago for bacterial meningitis, a brain infection that can lead to brain damage and even death. She survived the ordeal (thank goodness), but her hospital bills added up to $10,000 and as a college student, she barely had any emergency savings to speak of. Her boyfriend had to step in to help, by organising a fundraiser to get the money. You can read their sweet story here.That was truly a wake-up call for me, and I was reminded of the importance of hospital insurance as well as emergency funds.
If you and your parents are pretty healthy, perhaps your pet might be a more likely possibility. If your pet were to suddenly fall sick or require medical attention, it could cost anywhere from $150 to $20,000 to bring them to the vet and get the right treatment. Without an emergency fund, where will that money come from? Or do you just sit back and watch your beloved pet wither and eventually die, all because you didn’t have the money to save it?
3. Girls: You get pregnant / Guys: Shotgun wedding
I have a few girlfriends who were suddenly forced into parenthood when they got pregnant unexpectedly. Most of them kept the baby, and while some remain unmarried, quite a number of them went ahead with a shotgun wedding (amidst much gossip, of course).
Not everyone is as lucky as local blogger Tammy Tay, who got pregnant unexpectedly last year and decided to keep her baby. She said her boyfriend was “stable enough” to support her and the baby. Lucky her!
Even if you were to abort the baby, you have to fork out anywhere between $650 to $2000 for the surgery. If you had an emergency fund, this could help. But what if you don’t?
How I got started on my emergency fund
My first “emergency fund” saw me saving aggressively from age 19 to 21, because I wanted to go on overseas exchange but my parents had no money to pay for it. (Thus it doesn’t really count as an “emergency” since I foresaw it coming, but you get my drift).
But the real reason is in my background.
When the Asian Financial Crisis hit in 1997, my mother was retrenched from her company (a huge, prominent MNC with significant presence in Singapore). Thankfully, my father was spared, but suddenly living on just one person’s income was insufficient for our family of four. I watched as my mom called up friends and relatives to borrow money, but many of them were in similar straits and could not help much. In the end, she had no choice but to borrow on credit from the banks in order to continue funding our family’s living expenses.
Those were tough times. I was only a kid then, but I remember the stressed look that seemed to be permanently etched on my mom’s face throughout the day. It is difficult to lose your job, but even harder when you have kids to feed, a car to maintain and a house mortgage to pay off.
We ditched the car in the end (probably one of the best things we ever did). But it still wasn’t enough. Fortunately, when the crisis blew over in late 1998 or 1999, my mom was able to secure another job, and slowly she paid off all her debts.
I will never forget that period. And it made me realise from a very young age the importance of saving, so that when such unexpected events strike (and they often strike suddenly, without warning), you at least have a stash of cash to tide over the recovery period.
It’s simple enough to get started on your emergency funds. Just start small with whatever cash you can afford to save aside. One tip to doing this is to be careful with your budgeting and learn to cut down on your expenses to save more.
How much is enough?
Most experts recommend between 3 to 8 months of living expenses for your emergency savings, but in reality, everyone’s definition of “emergency” can differ. Thus, it generally is up to you to assess your own life and think about the sorts of sticky situation you could potentially end up in and what this might mean on your finances.
For example, if your income earnings are variable, you might want to keep more emergency savings as a safety “buffer” for any contingencies. Whereas if you have a steady source of income, you might be able to budget a portion of savings more regularly to go towards your rainy day funds.
For me, I’ve capped my emergency savings at 6 months. That’s because I only foresee a few major emergencies in my life at this stage – my parents falling ill or me losing my job – which I hope will not happen anytime soon. I believe 6 months is more than enough time for me to get a new job if I ever lose mine.
Save too much and you could be missing out on the chance to earn more interest on your money elsewhere, like in investments.
How much is too much?
There’s no fixed figure for this, so I’ll give my own personal opinion here. For me, I will never save more than 1 year’s worth of living expenses, because I would rather put that money to work for me in my investments. If you’re not really into investing though, then feel free to accumulate as much as you want!
Where should I keep my emergency fund?
In a biscuit tin can. I kid.
You need to find a place where you can withdraw your cash at any time (emergencies, remember?). I personally find the best choice would be a short-term fixed deposit account, as it offers slightly higher interest rates than a savings account. You need a minimum of $1,000 to start though. Furthermore, Singapore’s Deposit Insurance Scheme helps “protect depositors in the event a DI Scheme member fails by compensating insured deposits up to a maximum of S$50,000”. You can therefore rest easy that your money will not disappear or get cheated away from you.
Alternatively, you could consider the new Singapore Savings Bonds that will be launched in the later half of this year. You can keep a month’s portion of emergency savings for “critical” use, then put the rest into the Savings Bonds to accumulate interest. Should you need the money, you can always withdraw it later with no penalty.
You’re only 20-something. Why start talking about emergency funds and retirement so early?
I like the idea that I can quit my job anytime I want to, without worries. I’m still building my part-time income on weekends, but at the moment, it is sufficient to cover my living expenses (yes you read that right, I’m now saving 100% of my take-home pay from my corporate job compared to 50%+ last year!). My emergency fund is also sufficient to ensure that I can take a holiday anytime without financial worries either.
It does seem a little early to start talking about retirement since I’ve only graduated from university not too long ago. But I choose to spend less and save more with the end goal of achieving financial independence so that I never have to worry about not having enough money again (after experiencing this growing up).
It might seem a bit kiasu to start retirement planning now, especially when retirement seems so far away. But believe me, the sooner you start, the easier it will be for you.
This article originally appeared on Budget Babe’s blog and has been republished here with permission.