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

When you ask anyone for advice when entering the workforce, whether that's your parent, financial adviser or peers, one of the key things you'll hear about is to start building up a pool of emergency savings.

Having an emergency fund is a key prerequisite before investing or even getting insurance policies that you have to pay in cash - since, without a safety buffer of cash, you might end up causing your policies to lapse due to the inability to pay your premiums on time.

But how much exactly should one cater for emergency savings? The actual amount you need depends on a few factors, including your risk appetite, how stable (or unstable) your sources of income is, and how much financial responsibility you have on your shoulders.

WHY DO YOU NEED EMERGENCY SAVINGS? 

It might seem obvious, but in case you're not convinced, having emergency savings is a form of risk management.

You might be retrenched from your job, which happens more often than in the past, and may take a few months before landing your next job.

Your home or car might suddenly require repairs or maintenance. You could suddenly need to make an overseas trip to visit family or a friend in need.

There might be unexpected bills that pop up - of course, you should then take note of them so you can budget for them and not be caught unaware.

There are many unanticipated things that can happen in life, all of which would benefit from a pool of emergency savings.

With adequate emergency savings, you would also be in a position to make the calculated decision to help someone close who is in a dire financial position.

CALCULATING YOUR FIXED EXPENSES

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You might have read rules of thumb that state you should have a certain number of months worth of salary stashed away, but we believe that it would be more accurate to examine your fixed expenses in a month, and keeping a multiple of that as emergency funds.

Fixed expenses are things you have to spend on, without which there will be serious consequences. These include insurance premiums, the basic cost of food and transport, and recurring bills like utilities and your mobile plan.

While calculating your monthly fixed expenses, don't forget to factor in items you pay annually for, but are actually enjoying the amortised benefits of. These include your personal income tax bill, yearly insurance premiums, as well as road tax and motor insurance.

You would also need to decide if you wish to cater for "comfort" expenses like your Netflix subscription, gym membership, and bubble tea allowance. Such things could go a long way in keeping your morale up when the unfortunate occurs.

Depending on how conservative you wish to be, you should ideally have at least 6 months' worth of monthly fixed expenses stashed away, and even more, if you're a self-employed individual or have a large variable component of your salary. This is because you might need more to tide you through a prolonged period of tight cash flow.

CASH IS KING, BUT CREDIT IS PRETTY USEFUL 

In addition to setting aside cash, having quick access to credit can be invaluable - and if it comes at no cost, such as making an upfront payment first and receiving the reimbursements soon after, you should always use credit.

Towards this end, credit cards can be a powerful tool to give you access to potentially multiple months of your monthly salary - without needing to actually hold them in cash.

You just need to be disciplined in your use of credit cards and only use them for short-term expenses that you are certain you can pay off by the bill due date, otherwise, you will just be postponing the problem down the road, during which the problem can grow out of control.

WHERE TO KEEP YOUR EMERGENCY SAVINGS

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The nature of emergencies means that they should be accessible at short notice. But because emergencies are by definition rare, you also want to maximise the returns on your cash while they are on standby.

High-interest savings accounts like DBS Multiplier, OCBC 360, and UOB One are particularly suited to perform the role of storing your emergency funds for a rainy day.

Not only do they allow you to earn attractive interest, but they also allow your funds to be withdrawn at any time - whether that's via the extensive network of ATMs, via bank transfer, or digital payment methods like PayNow.

The bonus interest tiers have an added benefit of incentivizing you not to touch your emergency funds, and in fact, reward you for saving up even more.

If you've maxed out the bonus interest you can earn on these high-interest savings accounts, you can consider adopting a hybrid approach, in which you keep a certain portion of money in savings accounts and others in risk-free instruments like Singapore Savings Bonds or fixed deposits.

Since the goal is to be ready for contingencies, having your emergency capital guaranteed and there for you is critical.

Funds placed in these instruments may take slightly longer to access, such as a few weeks, so this is something you need to be aware of.

REVIEW, REPLENISH, REPEAT

Before touching your emergency funds, you should always ask yourself if that purpose constitutes an emergency and whether you will be comfortable with a lower emergency fund for the duration it takes you to replenish the money. This is because you don't want to use a large chunk today, only to need it more tomorrow.

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You can set ground rules for yourself beforehand, and hold yourself to them. In the event you used the funds and feel uncomfortably exposed before the money is topped-up, then it might be a sign that your initial emergency savings target is too low and you could revise it upwards.

Be sure to also review your fixed expenses every few months, since your lifestyle and needs might change, and your emergency funds target should change with it.

Another great time to review your emergency savings needs is when receiving a bonus - since that's cash you didn't count on anyway, and is certainly less painful than forcing yourself to put aside a certain amount month after month.

This article was first published in Dollars and Sense.