Emergency Fund Basics: How Much Should You Save?

The Purpose, Size and Rules of an Emergency Fund

Questions many beginners have

Do you also feel that saving money is difficult?

After finally saving some money, do you accidentally spend it?

Do you keep saving without knowing whether it is enough?

Have you been told that saving is important without ever asking what the money is for?

The difference with wealthy people is that they start with WHY. Without a WHY, there is no goal. You end up saving blindly, spending casually and investing without direction. Without a clear goal, it is easy to follow the crowd and then become uncertain or blame everything else when things do not go smoothly.

You save for one main purpose

That purpose is an emergency fund, also known as emergency savings.

After building enough emergency savings, the rest should be invested, because saving alone cannot make you wealthy. I believe you have seen these two kinds of people:

• They have not saved enough for emergencies, yet boldly start investing;
• They save too much for emergencies and are afraid to invest.

Which one are you?

The order matters. Build enough emergency savings before you start investing.

Save just the right amount

How much counts as just right?

You can use the most common calculation, or make it more relevant by looking at your employment risk. Theory is fixed, but we need to apply it to real life.

Ask yourself: Based on your skills, expertise, position and industry, would you need three months or six months to find another job?

This can be a more useful guide. Age, industry and country all make a difference, so adjust the amount to the place, time and circumstances.

Do you remember the two types of people mentioned earlier?

• Saving too much is not ideal. It is very conservative, and low bank-deposit rates may not help you reach your financial goals;
• Saving too little is worse. The risk is high because the money is not there when you need it.

The right amount is best.

Where should you keep an emergency fund?

In the past, most people kept emergency savings in a bank fixed deposit (FD). As times changed, newer products such as VERSA, KDI and TnG+ appeared. More options will come, so it is more important to understand the selection criteria.

A financial tool used for emergency savings should meet two conditions:

1. The principal must be safe and should not be placed in high-risk investments such as shares;
2. It must be highly liquid, meaning the money can be accessed quickly and conveniently.

Which place is better?

I can only say that I am not you, so I do not know unless you tell me about your financial situation.

For example, if you have credit-card debt charging tens of per cent in interest each month, should you be worrying about which MMF is better instead of paying the debt first?

The choices may also differ when you are saving RM1,000 compared with RM100,000. Any suggestion made without understanding your financial position would not fit you and would be meaningless, unless the purpose was simply to earn money from you.

When may you use an emergency fund?

Few people discuss when emergency savings may be used, but I think this is important.

Many people never define the rules for their emergency fund in advance. That is one reason they struggle to keep the money saved.

Does a last-minute invitation from a friend to travel count as an emergency?

Does a limited-time offer on a new electronic device count as an emergency?

One human weakness is self-justification: we create reasons that sound absurd to others but seem reasonable to us.

Summary

If you can manage one responsibly, a credit card can be useful for paying first during an emergency. You can then withdraw from the emergency fund to repay it. After using the fund, remember to rebuild it.

If you cannot control your spending, it may be better not to have a credit card. Another human weakness is poor self-control. Why else would banks spend so much on gifts and even guaranteed cash rewards to attract credit-card applicants?