Emergency fund: How to build it the less painful way and where to keep it

An emergency fund is ideally six months’ worth of income that you leave untouched until life throws a financial emergency your way. 

Having a sizable sum of money set aside for rainy days can help you avoid going into debt should an unexpected situation arise. Another reason? The psychological assurance of knowing you have an emergency cash fund to buffer against the blows of life’s unforeseen circumstances.

What constitutes an emergency varies from person to person, but it’s usually an unexpected medical expense, sudden job loss, urgent housing repairs, or pet surgery. Your emergency fund may also be used to help loved ones who need urgent financial assistance to tide over life’s challenges. 

Another key feature of an emergency fund? It should be liquid, kept within reach but not so accessible that it’s easy for you to squander your savings away on non-emergency purchases. 

How to build up your emergency fund?

1. Automate the saving process

It is difficult to save on willpower alone. Setting up an automated process to funnel 20per cent of your monthly pay into a separate bank account will keep your money out of sight and out of mind. Be disciplined and don’t touch this alternative bank account!

2. Grow your income

In the current economic climate, we need to be more proactive in seeking a side income to supplement our finances.

While nothing comes easy, it doesn’t hurt to inject a healthy dose of motivation to hustle. Need a leg up? These business ideas need little to no capital. An extra few hundred dollars a month can make all the difference.

3. Squeeze savings out of every purchase

Comparing prices isn’t enough if you are serious about maximising your savings. The easiest way to save on purchases is through a cashback credit card, which gives you a small discount when you use it to pay for items. 

Some offer a flat cashback rate across all purchases while others offer a higher cashback rate when you spend on essentials like groceries, dining, and petrol. Depending on your spending habits and preferences, some credit cards may be more suitable for you than others. 

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To ensure your cashback rewards really count, try not to carry over balances to the following month. This means staying on top of your credit card bill payment every month. A simple workaround? Simply set up GIRO payment so you’ll never have to worry about missing your bills.  

4. Use the blitz approach if you’re impatient

Some people can endure immense deprivation for short periods. Others can tolerate small deprivations for years on end. Decide which of the two you are.

If you can handle a massive downgrade on your lifestyle for just a year or two, you may want to ‘blitz’. This means spending a short time saving a huge amount. For example, you might want to live on just 50 per cent of your income for the next year and a half to build up your emergency fund ASAP.

Once you hit the goal of six months’ income, you can relax considerably with your savings goals.

This is easier to do if you are young and single, and don’t have a family to support.

5. Withhold your bonuses until the fund is built

Until you’ve built your emergency fund, any bonuses should be funnelled straight into it. You can enjoy your bonuses after the fund is established– in fact, once the fund is complete, you can have the option to splurge on something you like.

6. Be persistent

There may be times when you are forced to dig into the fund. An emergency might happen before the fund is ready, or there may be months when you just cannot contribute. Don’t let these events derail you. Shrug it off, and go on building the fund again as soon as you’re able to.

Remember: If you find this process frustrating, you are not alone. Just grit your teeth and go through with it.

Where should you keep your emergency fund?

An investment in stocks, ETFs, or a fixed deposit with fairly long tenure, is not the right place for an emergency fund: you may not be able to liquidate (i.e. convert into cash) such assets on short notice without making a significant loss. 

This is especially true if you find yourself in need of urgent cash when the markets are down and/or your money is locked. 

ALSO READ: Working adults guide to starting an emergency fund and how much you should have in it

If you withdraw from a fixed deposit before maturity, you will lose the interest. In some cases you may even face penalties.

Short-term fixed deposits

For the most part, an emergency fund should be kept in a simple savings account. However, with banks offering fixed deposit options with much shorter tenures now (think: Three months), you might want to consider these to earn higher interest on your savings instead of the measly 0.05 per cent per annum offered by basic savings accounts.  

Singapore Savings Bonds

Once you have your emergency fund saved, consider keeping them in Singapore Savings Bonds (SSB).

The wonder of the SSB is that you can cash out anytime without losing the accrued interest. If you end up not using your emergency fund for 10 years, you would have also earned interest of around 2-3 per cent per annum.

That’s not huge, but at least your money won’t stagnate or drop in value. You can obtain SSBs from participating banks, and they start from as low as $500.

Save in US dollars

A simple way to make your savings inaccessible (but still have them on hand) is to save in a different currency. US dollars are possibly your safest bet.

One way to do this is to open a multi-currency account with a bank. This is an account that can hold different denominations of currency at the same time (e.g. you can have $2,000, RM 8,000 (S$2,600), USD$700 (S$935) all in the same bank account). 

Opportunity cost of having an emergency fund 

An emergency fund isn’t all rainbows and sunshine. The main cost of having an emergency cash fund is that it will literally cost you – in value lost due to inflation. This means that you can expect your emergency fund of say, $30,000 to be worth significantly less in 10 years.

In the case of idle cash balances, the opportunity cost is the interest you would have earned if you had conservatively invested that money instead. 

If you’re savvy enough to invest your own funds, your interest earned per annum could potentially be even higher. And even if you’re not, robo-advisors like StashAway and AutoWealth are a great – and relatively safe – alternative to trading your own funds.

Should you have an emergency fund?

The short answer is yes, but you shouldn’t be holding on to too much cash beyond what you absolutely need. Your spare cash can be used to grow your wealth through means like savvy investing which, over time, helps grow the value of your money or at least prevent it from devaluing.  

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